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A few questions on PCP finance please...

If I take out a PCP option on a new Renault after three years I can get a new car. My question is - will my repayments drop because of it being a three-year old car being upgraded to a new one? If I get a bank loan (which is dearer initially) I own the car after the loan is paid off or partly paid off and am in a better position when trading up. What collateral do I have with PCP?

Briege Renaghan (Dundalk)

Feb 2016 Filed under: finance

Expert answer

Hi Briege,

OK, couple of things to deal with here.  No, your repayments won't change as your car ages - the repayments on a PCP deal are fixed from the start and run for the life of package.

Actually, if you get a bank loan, you own the car from day one because you're paying cash (or cheque I guess) up front - you just have to keep paying the bank back the money and, when you come to sell the car, the entire second hand value is yours. 

On a PCP programme it's a little different. Effectively you're leasing the car (and you have to keep within mileage and condition limits too, which is worth remembering). At the end of the deal, there is still a significant amount of financed loan money to pay off - the so called bubble payment, usually between €4,000 and €6,000. The idea is that the second hand value of the car, guaranteed at the start of the agreement and backed by the dealer and finance provider, will cover the bubble payment and leave a little equity left over to act as a deposit for the next car. 

That's the point of a PCP really - it insulates you from unpredictable depreciation because you know what the value of the car will be at the end of the agreement and the leaving of the bubble payment to the end reduces the cost of the monthly repayments. 

The downside is that you don't own the car, unless you decide to pay the bubble payment at the end and keep it - and you have to stick to the mileage and upkeep stipulations. And you really have to want to come back in three years time and buy another new car, because ultimately that's what a PCP is designed to do - keep you coming back for more cars.
Neil Briscoe - Complete Car Advisor
@neilmbriscoe


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