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Car finance for dummies

  • 08-11-2019 12:06am
    #1
    DrPhilG
    Registered Users, Registered Users 2 Posts: 12,808 ✭✭✭✭


    Lease, PCP, Hire purchase, blah blah blah.

    Someone care to break it down for me? Apart from once, I've only ever bought second hand cars for cash but I'm in the mood for a shiny new one.

    I hear people on about lease options where you essentially are only paying for the depreciation, and after the set period you might get lucky and have more equity in the car than the final payment. But I asked a dealer about that and he looked at me like I was nuts.

    Anyone have an idiots guide? Save me relying on the sales pitches.


Comments

  • #2
    mickdw
    Registered Users, Registered Users 2 Posts: 23,795 ✭✭✭✭mickdw


    What you describe is Pcp.
    You won't get a lease here on a private non company car I'd say.
    Hire purchase is basically where you.finance the cost of the car less any deposit or trade in over a number of years and you own it at the end.
    Pcp - typically manufacturer sets a worst case value that they believe the car will be worth at end of 3 year term.
    Example 30k car. Guaranteed value at end might be 13k.
    What the Pcp deal does is set aside the 13k until the end of term making monthly payment smaller and at the end of term you pay the 13k and own the car or you simply hand it back. The other option is to trade in for a new car. If the car is worth more than the 13k, the extra is yours to go towards your new car as a deposit.
    Pcp with some.of the zero interest deals can be among the cheapest ways to finance a new car.
    Pcp with interest starts to get tricky. Because you.really borrow the 13k that is set aside also on day one, the interest tends to add up on that bit as it's not reducing at all over the term so the result is a Pcp with for example 5.9 percent interest will cost you more than hp at 5.9 for the same borrowings.


  • #3
    DrPhilG
    Registered Users, Registered Users 2 Posts: 12,808 ✭✭✭✭DrPhilG


    Thanks, so...

    If the dealer is more optimistic on the depreciation, say they reckon that the €30k car will still be worth €20k, then your monthly payments will be less but you're still paying interest on the €20k figure too? And when you get to the end and the car is worth €15k, you can just walk away and it's the dealer who has lost out?

    On the flip side if they are pessimistic on the value and say it will only be worth €10k, your monthly numbers will be bigger but at the end of the term you'll have €5k equity to go towards the next car?


  • #4
    bazz26
    Registered Users, Registered Users 2 Posts: 51,480 ✭✭✭✭bazz26


    There are a number of threads on here already around how PCP works:

    https://www.boards.ie/vbulletin//showthread.php?t=2057974399
    https://www.boards.ie/vbulletin/showthread.php?t=2057829641
    https://www.boards.ie/vbulletin//showthread.php?t=2057958199
    https://www.boards.ie/vbulletin//showthread.php?t=2057934818
    https://www.boards.ie/vbulletin//showthread.php?t=2057120240


  • #5
    mickdw
    Registered Users, Registered Users 2 Posts: 23,795 ✭✭✭✭mickdw


    DrPhilG wrote: »
    Thanks, so...

    If the dealer is more optimistic on the depreciation, say they reckon that the €30k car will still be worth €20k, then your monthly payments will be less but you're still paying interest on the €20k figure too? And when you get to the end and the car is worth €15k, you can just walk away and it's the dealer who has lost out?

    On the flip side if they are pessimistic on the value and say it will only be worth €10k, your monthly numbers will be bigger but at the end of the term you'll have €5k equity to go towards the next car?
    Ya some car brands have been pushing optimistic deals with what amounts to an artificially low monthly. The problem with this the is that you are certain to have zero equity at end. Handing back is ok but when you consider that you will have put in a deposit day one and now you have no deposit to go forward without coming up with more cash, it's not a great way to go. Lots of people turned up at dealer with a fully paid for trade in and took a Pcp burning up all the value of their trade in and the monthly over the 3 year period leaving them with zero at end of 3 years.
    VW seem to have it right. Good enough residuals. Sensible guaranteed value and zero percent interest on some models.
    Going back with vw will often easily get you 15 percent equity remaining at end.
    A useful check is therefore to do your calcs now based in putting in 15 percent deposit. If the monthly work for you at that deposit level, it might just be a nice deal.


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