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Maybe I didn't understand the deal I bought a car with, or maybe it's an unusual deal, but I'm happy with it. My car costs me a set amount per month that I can

Maybe I didn't understand the deal I bought a car with, or maybe it's an unusual deal, but I'm happy with it. My car costs me a set amount per month that I can afford, an amount that is actually equal to the monthly depreciation it would face anyway (on average) over a three year period (including the initial low value deposit I paid, this is still true). Even if I bought it outright, which I couldn't afford to do, I'd 'lose' the same amount of money _in total_ thanks to that depreciation. Effectively I'm 'renting' the car for the same 'cost' as owning it, just without the upfront payment. Further, GAP insurance purchased at a one off price of about £100 (which was far more tricky to make sure I got the correct thing) will cover any difference in the 'hand back' price at the end of my term and the value of the final payment. So basically if the car does depreciate below the value of the final payment then the GAP insurance will make up the difference. Likewise if I have an accident etc. I reject the idea that PCP deals are like 'buying and selling a series of homes using interest-only mortgages'. Cars lose value, always. Whether you buy it outright or not, it'll depreciate in value (save for some hyper rare beasts you aren't going to be buying on PCP anyway). But the article doesn't address this point at all as far as I can see and it's an important part of the value proposition of using these types of deal.

pmuk 9y ago
I agree. I helped my younger sister buy a car on a PCP recently, and I think they are actually a reasonable deal. It is my understanding that finance company guarantees the future value (GMFV) and that the final payment is optional, e.g. you can always hand the car back at the end of the term if it is worth less the the balloon payment.
- jacquesm 9y ago
  That final payment combined with the trade-in value is structure such that the dealer is the only party that will give you a good price on the vehicle and you'll get a new car instead of buying out the old one.
  - ZeroGravitas 9y ago
    This seems to be the crux of the issue. I'd noticed that everyone seemed to be spending more on cars than I felt was wise. After discussing it with a friend with one of these deals he said he basically felt trapped into buying a new car after 3 years.
    - brianwawok 9y ago
      Yes. The deal is dandy if you plan to buy every 3 anyway. If you don't, that is the big downside. (Or if you want to drive a lot of miles, etc). Buying a car every 10 years is a lot more fun than every 3..
cjrp 9y ago
My understanding is GAP insurance only comes into play if the car is written off (and makes up the difference between what the car was worth and what the insurer pays out). I didn't think it was designed to cover any shortfall in the hand back price?
- deleted 9y ago
  [deleted]
- kemiller2002 9y ago
  This is the way I've seen it too. It may not be everywhere now, but it was meant to be a safety net in the event that a car was totaled and you still owed the finance company money. For the finance companies, this was essentially free money. Of course they ran loss statistics on it to make sure that it was in their favor, but I did see it save people from a really bad situation. My coworker, driving to work one day got hit and totaled his car. He actually got his car loan at the company we worked for before he started working there. They just wrote off the car, and he was able to go and get a new 0% interest loan. Total win for him. This is the exception not the norm though.
amelius 9y ago
Did you compare with the cost of a similar loan from a bank?
DanBC 9y ago
Are you keeping an eye on your mileage? Some people don't, and get stuck with large bills when handing the car back.
- eximius 9y ago
  Heh, this is going to be me next year if I don't start dialing it back a bunch soon. Though I was single for part of it so it wasn't like I had a ton of options.
Consultant32452 9y ago
You're not just paying the depreciation, you're basically getting a loan for the (depreciation value + profit). And the average interest rate on that loan is 14% APR. This interest rate doesn't have to be disclosed to you though, because it's not "technically" a loan. There's a reason why auto dealers advertise leasing so much, it's the most profitable business for them. Leasing is the most expensive way possible to drive a car. https://www.youtube.com/watch?v=t1NaDucAXIg https://www.youtube.com/watch?v=t1NaDucAXIg

pmuk 9y ago

I agree. I helped my younger sister buy a car on a PCP recently, and I think they are actually a reasonable deal. It is my understanding that finance company guarantees the future value (GMFV) and that the final payment is optional, e.g. you can always hand the car back at the end of the term if it is worth less the the balloon payment.

jacquesm 9y ago
That final payment combined with the trade-in value is structure such that the dealer is the only party that will give you a good price on the vehicle and you'll get a new car instead of buying out the old one.
- ZeroGravitas 9y ago
  This seems to be the crux of the issue. I'd noticed that everyone seemed to be spending more on cars than I felt was wise. After discussing it with a friend with one of these deals he said he basically felt trapped into buying a new car after 3 years.
  - brianwawok 9y ago
    Yes. The deal is dandy if you plan to buy every 3 anyway. If you don't, that is the big downside. (Or if you want to drive a lot of miles, etc). Buying a car every 10 years is a lot more fun than every 3..

cjrp 9y ago

My understanding is GAP insurance only comes into play if the car is written off (and makes up the difference between what the car was worth and what the insurer pays out). I didn't think it was designed to cover any shortfall in the hand back price?

deleted 9y ago
[deleted]
kemiller2002 9y ago
This is the way I've seen it too. It may not be everywhere now, but it was meant to be a safety net in the event that a car was totaled and you still owed the finance company money. For the finance companies, this was essentially free money. Of course they ran loss statistics on it to make sure that it was in their favor, but I did see it save people from a really bad situation. My coworker, driving to work one day got hit and totaled his car. He actually got his car loan at the company we worked for before he started working there. They just wrote off the car, and he was able to go and get a new 0% interest loan. Total win for him. This is the exception not the norm though.

amelius 9y ago

Did you compare with the cost of a similar loan from a bank?

DanBC 9y ago

Are you keeping an eye on your mileage? Some people don't, and get stuck with large bills when handing the car back.

eximius 9y ago
Heh, this is going to be me next year if I don't start dialing it back a bunch soon. Though I was single for part of it so it wasn't like I had a ton of options.

Consultant32452 9y ago

You're not just paying the depreciation, you're basically getting a loan for the (depreciation value + profit). And the average interest rate on that loan is 14% APR. This interest rate doesn't have to be disclosed to you though, because it's not "technically" a loan. There's a reason why auto dealers advertise leasing so much, it's the most profitable business for them. Leasing is the most expensive way possible to drive a car. https://www.youtube.com/watch?v=t1NaDucAXIg https://www.youtube.com/watch?v=t1NaDucAXIg