The arrival of our first grandchildren (twins!) will result in a purchase I never thought I would make – a family car that will henceforth be known as Papa and Grandpa’s Taxi Service.
We did thorough research, set a budget and recruited family members to look for suitable second-hand models. However, unlike most UK car buyers, we do not intend to undertake PCP (Personal Contract Purchase) financing.
That said, it’s actually rare Buy a car with PCP – most people renew their financing contracts and get a new engine about every three years.
It’s a way to drive away a new or used car that you could never afford to buy. By signing an installment purchase agreement with a massive final payment at the end (the “balloon payment”), drivers are charged interest on the entire amount borrowed, but they still have to put up some money if they want to keep the car.
Years of rock-bottom interest rates have fueled cheap financing deals, but could the cost-of-living crisis cause the wheels to shake?
Credit becomes more expensive with new PCP deals, which now typically span four years. Even people contracted in happier times may find that payments of £400 or £500 a month are a growing burden as the cost of rent, mortgages and household bills soar – not to mention soaring costs for fuel and car insurance.
Stuart Masson, a former car dealer who now runs The Car Expert website, believes many drivers regret “growing up” on expensive PCP deals.
“The auto industry absolutely relies on people buying cars they don’t need with money they don’t have,” he says.
Industry statistics have yet to reflect significant consumer distress, but judging by the press releases that have popped up in my auto finance inbox, many drivers are already feeling the pinch.
If you’ve paid off more than half of the total outstanding amount on your PCP contract and can’t afford it anymore, you can usually return the car with no penalty. However, financial companies want drivers to find ways to manage paybacks and keep their vehicles.
Ford Credit, which has 2 million customers using its Options PCP product, says it is testing a range of solutions that offer greater flexibility to customers who “manage potential changes in their financial situation.”
A recent press release from a car loan refinance company says a 21-year-old north Londoner has reduced the APR on payments on his Mercedes GLA from 26.8 per cent to “just” 12.9 per cent, saving him nearly £8,500 saved interest. God knows how high his insurance bill is!
I blew all of this up with Peter Campbell, the FT’s global auto correspondent. Though some consumers have signed stunning deals, he thinks the cost of financing is the wrong metric to focus on.
“By far the biggest factor in PCP deals is the depreciation rate you’re funding,” he says, noting that global shocks in the auto industry’s supply chain have caused used-car values to skyrocket.
Since financing contracts are concluded after three or four years based on the car’s value, at the end of PCP contracts many drivers find that they have equity in their vehicle as its value has decreased less than expected.
He uses the example of a BMW with a sticker price of £40,000. “Let’s say your contract has £15,000 written off over three years – that’s basically what you’re borrowing to fund it,” he says. “Yes, interest does accrue, but if the BMW ends up being worth £35,000 because used car prices are going up, you’re in a good position.”
Buying the car would decrease the value of the “balloon payment”. However, Masson predicts car dealers will trick drivers into turning around and taking out another PCP on a still-flasking engine.
With a long, hard road to economic recovery, it might be wiser to opt for a smaller, less flashy car with lower monthly payments.
Used car prices are starting to fall from historic highs, but Peter believes the huge price rally and long lead times for new cars will keep residual values high for years to come.
This might prevent the auto finance market from exploding – but it feels like a lucky break!
I wonder how many people fully understood their PCP contracts when they signed the papers at the dealership and are now tied into deals they find difficult to afford.
Dave Ramsey, the US finance guru, has a rule of thumb – the combined value of all your vehicles should never be more than half of your annual household income (tell that to the 21-year-old with the Merc).
Of course, I’m assuming some FT Money readers are prudent members of the Bangernomics school and are using cash, cheaper personal loans, or even 0 percent credit cards to fund their vehicle purchases.
But I need look no further than my inbox for another accelerating trend for those looking to buy an electric vehicle (EV).
Electric vehicles are expensive, but a growing number of employers are offering their employees the option of leasing one with a pay cut.
Paying for a green car with their pre-tax gross income could save employees hundreds of pounds in income tax and National Insurance payments each month – an attractive prospect as tax thresholds plummet. There are also attractive NI savings for employers.
According to one vendor, LoveElectric, a higher-rate taxpayer could typically save about 50 percent by renting an EV for a salary waiver compared to procuring an EV directly through a PCP.
According to the British Vehicle Rental and Leasing Association, demand for zero-emission driving is growing rapidly, both from fleet drivers and employees in wage-waiver schemes.
Its members saw a 33 percent year-over-year increase in EVs delivered through sacrificial programs, with 84 percent of EV sacrificial deliveries occurring in the trailing 12 months.
If you’re tempted, the Fall statement confirmed that in-kind tax rates on electric cars will remain at an extremely low 2 percent through April 2025, before increasing by 1 percent every fiscal year through 2028.
Waiting times for delivery are around 7-12 months, but with these savings, paying the soon-to-be introduced road tax will not be a problem.
Claer Barrett is Consumer Editor of the FT and author of What They Don’t Teach You About Money. firstname.lastname@example.org; Twitter and Instagram: @Clearb