My Financial Times article on car financing & why I think PCP is madness

Picture of three toy cars including a Ferrari, to illustrate my post on why I think PCP car finance is madness

Nearest I’m likely to get to a Ferrari


Excitement at the weekend, when the first article I’ve written for the Financial Times made it into print, explaining car finance and the pros and cons of PCP.

(You can find the article here, and may even be able to read it before the paywall kicks in).

Hopefully, it’s useful for anyone considering buying a car using a Personal Contract Plan, also known as a Personal Contract Purchase. PCP is massively popular – more than 8 out of 10 brand new cars are bought using PCP, and nearly half of used cars too.

But I would never buy a car using PCP myself.

Why not?

Well, PCP is great if:

– you like having a brand new car sitting in the drive (doesn’t bother me)

– you like swapping your car at regular intervals (nope, doesn’t bother me)

– you’d like to afford a fancier car than you would otherwise, trading up from say a boring old Ford to a whizzy BMW or Audi (nope, still not bothered, and beginning to sound like Catherine Tate)

– you can keep your car lovingly maintained and in immaculate condition, without a single bump or scratch (We have two children, drive along country roads, and I’m only just starting to drive again. How much stress do you think that might cause?)

– you drive predictable amounts and can keep within the mileage limits (again, would rather not worry about mileage limits when we’re making plans for the weekend)

– you don’t mind not owning the car during the contract (actually, this one does bother me. I like to use things as I choose, without worrying about having to give them back).

– you don’t mind paying interest for money you’ve borrowed (I’d much rather earn interest than pay it, even when rates are low)

PCP sounds great because the monthly payments are typically lower than if you got a car using trad hire purchase or a personal loan.  Why? Because the payments don’t cover the whole cost of the car.
Instead, you’re just paying the difference between the current value of the car – less any deposit and trade in – and the expected value of the car at the end of the contract.
Your hard-earned cash pays the cost of the car’s depreciation, usually with a chunk of interest on top.
If you choose to buy the car at the end of the contract (and admittedly few people do) you’re likely to end up paying MORE in total to own the car than you would using HP or a loan.

All the industry experts I spoke to compared PCP to buying a mobile phone on contract. Loads of people shell out £50 or £60 a month to have the latest iPhone this or Galaxy that and switch to a new model every few years, and like taking the same approach with their car.

But – klaxon alert – I don’t pay £50 or £60 a month for a fancy phone on contract. I bought a slightly older model outright, and pay a fiver a month for a SIM only deal. Because guess what – it’s massively cheaper!

Personally, I reckon if you’re trying to make the most of your money, then PCP is madness.

PCP, and the buying culture it encourages, is the opposite of the thrifty tactics I try to follow.

1. Paying more than you need is expensive

It frustrates that hell out of me that when people find they could pay the same each month for say a Ford Focus on hire purchase, or a Merc on PCP, they say: “Cheers, I’ll pay for the same for the Merc”, rather than “Fantastic, I’ll get the Ford on PCP and use the spare money for something else”.

Think what that money could do! Pay off debt, save up for something fantastic, help towards retirement or hey build enough to buy your own car outright so you’re not shelling out to a finance company.

2. Depreciation is expensive

Why oh why would anyone want to set fire to thousands of pounds just by driving a brand spanking new car off the forecourt? Seems rather a lot for a new car smell, the latest number plate and the chance to be the first name on the registration documents.

From a frugal perspective. it makes much more sense to let someone else pay for the plunging depreciation, and buy the same car second hand a few years later.

3. Driving someone else’s car can be expensive

PCP deals are driven by depreciation, so the condition and the mileage of the car matter a lot. When you sign up to PCP, you’re also signing up to keep the car in good condition and below agreed mileage limits.
At the end of the contract, if the car is damaged, or you’ve driven further than expected, you’ll have to foot the bill. Typical mileage excess charges run at about 10p a mile – which doesn’t sound all that much. But if you return a car with 35,000 miles on the clock, rather than the 30,000 agreed, that adds up to £500. Ouch.

I’d much rather we own our own car, and don’t have to panic about any dent, scratch or extra journey.

3. Interest is expensive

I resent paying interest. It makes everything more expensive. Ideal world, I’d rather save up and buy a reasonably priced second hand car outright. This might not make me the car dealer’s favourite person, but I prefer paying less.

I do appreciate that some people need a car, right now, if for example they couldn’t work without it and don’t have a several thousand pounds to spare. In that situation, I’d still go for the reasonably priced second hand car, so the monthly repayments were lower and I could save the difference towards buying outright.

4. Swapping cars is expensive

Expensive in terms of the world’s resources, that is. Trading in a brand new car every two or three years seems a shocking waste of materials and labour. Yes, if you buy an old banger you’re likely to face expensive maintenance bills, but surely a three-year-old car isn’t about to expire?

Of course, it helps that I’m not a petrol head and don’t get fired up about cars. What kind of car have we got? A blue one. (I’m only slightly joking here).

From a frugal perspective, I focus on finding a good value car with low running costs – so a reliable brand, with low fuel consumption and inexpensive insurance. Buy it, keep it, and only consider a new one years later when it’s less reliable and the repair costs start mounting up.

Over to you. Are you a fan of PCP, or prefer to buy your own car outright? Car lover, or view cars as a necessary evil to get you from A to B? What are your top tips when buying a car? I’d love to hear, so do share your thoughts in the comments.

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  1. 28th March 2017 / 7:47 pm

    Basically.. Pcp is like renting car for 2 years instead of buying.. It would be Great if you can give some real numbers to see how much really cost having a car in London for example.. I guess this is best for Uber Drivers that you see everywhere these days.. Rgds

    • 28th March 2017 / 8:19 pm

      I have a distinct suspicion that renting a car for 2 years, via personal contract hire (PCH), can actually end up cheaper than PCP. Good point about adding up the true cost of car ownership. When we lived in London we put off the expense of car ownership for as long as we possibly could, and used alternatives like short term rentals and car clubs. That's a lot less feasible since we moved to Suffolk!

  2. 28th March 2017 / 11:36 pm

    We have an nine year old car we bought outright from savings four years ago. We put money aside each month for repairs and expenses plus the next car. It's a cheap, reliable brand which attracts jokes about skips but hey, it's ours, paid for!

    • 1st April 2017 / 6:21 am

      Great plan to set aside money for repairs and expenses, so the cost doesn't come as a nasty surprise. Reckon if you can find a cheap reliable car that does the job of getting you from A to B that's worth any jokes!

  3. 31st March 2017 / 9:23 pm

    I didn't know what PCP was until I read this. Thanks for explaining. I save up for a decent second hand car, and I like the Ford Focus.

    • 1st April 2017 / 6:28 am

      Ilona! Lovely to hear from you on my blog. Glad it was helpful in explaining PCP. In my limited knowledge of cars, the Ford Focus is a good bet for lower running costs because it's popular and the parts are readily available. Was that what you found when you had one before?

  4. 1st April 2017 / 6:13 pm

    I bought a second hand car for cash for all the reasons you stated and particularly the need to keep the car in perfect condition! However trying to get any customer servce from a main dealership when they knew I was a cash buyer was impossible. Clearly the salesman's commission from the finance deal is an important part of income. I ended up buying from a smaller used car specialist where they were more keen to sell me a vehicle than a finance deal.

    • Faith
      14th July 2017 / 11:34 am

      Yes we found that when we told the car salesman we’d be buying in cash, he became distinctly less interested in our business! Good tip about using smaller specialists.

  5. Chris Vowles
    10th July 2017 / 11:11 am

    I think your point about people finding they have the choice between owning a modest car or PCP-ing a BMW or Mercedes is key. My personal opinion is that snob value is driving people into PCP land: and in fact they are fools being very effectively parted from their money. The good news is that 3-year-old cars (ex-PCP ones) are becoming more affordable since the market is awash with them.

    • Faith
      14th July 2017 / 11:37 am

      Definitely good news for bargain hunters with so many good quality second hand cars becoming available. Do wonder how it will affect the overall car market in future – surely it risks making PCP more expensive, if resale prices plunge due to an over-supply of cars, and more people opting to buy new?

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