20 December 2017
Consumers are now increasingly choosing PCP (personal contract purchase) or lease contracts rather than buying their cars outright. According to the Society of Motor Manufacturers and Traders, about 80 per cent of new cars in the UK are now sold on PCP contracts. As with many subscription services, you pay a deposit, followed by a series of monthly payments usually between two to four years, but you do not own the car at the end of the term since the payments are designed to cover the depreciation of the vehicle to date plus a small margin.
PCP deals have very much supported the automotive sector over a number of years by offering new cars at more affordable prices than ever before, however the affordable PCP and lease model is fundamentally reliant on strong residuals. Over the last few years, as a result of dealers having been very keen to get their customers into new cars even before the existing contracts have come to the end, this has led to an increase in stock levels which in turn has hurt used car prices. Therefore the contract costs going forward will have to increase in order to compensate for the additional depreciation. Bearing this in mind are PCP contracts still the best option?
Ownership/Hire Purchase
These days, if you want a new car it is becoming less and less common to own the car outright or buy on hire purchase since you can lease a car and treat it like your own car, yet at the end of the agreement you can just give it back to the leasing company without the hassle of selling it or trading it in.
A benefit of owning your car is that there are no mileage limits, whereas with a PCP or a lease you will have to pay extra charges if you’ve gone over the mileage you agreed in your contract. However not owning your car also has some distinct benefits, since if there are any problems it’s the leasing company’s responsibility to resolve the issue.
Leasing
To lease a car, as with a PCP contract you will normally pay an initial payment, equivalent to a few months rental, then a series of monthly payments until the end of the term of the contract.
The downside with leasing is that you have no contractual option to buy the car at the end of the term, therefore you must arrange another one with more monthly payments if you still want to have a car, but overall they are very similar to PCP contracts.
Another potential downside is that lease deals leave you with a little less flexibility than you might get with a PCP finance package. If your circumstances change during your lease agreement, you’re committed to the remaining payments, or at best a penalty from the leasing company. On the other hand, most PCP agreements let you cancel them after a certain amount of time provided you have paid 50% of the finance balance.
Choosing a lease deal would therefore very much come down to the specific deal on offer assuming that the lack of flexibility in comparison to a PCP deal is not a concern.
Business car leasing
You can also lease a car through your business rather than as a private customer. This is fundamentally a very similar process with an initial rental then a series of monthly payments in exchange for a new car. The two methods do differ slightly, however businesses can claim back a portion of the VAT on their lease depending if the car is used for personal trips or commuting.
Conclusions
In summary PCP’s still offer the most flexibility to consumers, therefore for those who want a new car every few years they still make the most sense.
However, whether you go for a PCP or a lease can very much come down to the deal on offer and there are significant savings to be found for those willing to shop around by using various search engines to find the best deals. These platforms allow consumers to select the model and spec of car they want and get quotes from dealers nationally therefore can lead to far more competitive deals.
Some of the best deals can relate to cars already in stock which dealers want to get off the forecourt and earn an income from, therefore if you can bear not to have the exact spec of your choice, then there can be some fantastic deals to be found. December and January can be a great time to find a good deal on a new car since this is historically a quiet time of year for dealers.
If you would like to discuss the implications of this blog, please contact me or your local UHY contact. Alternatively, if you would like to read more of our automotive related blog posts, please click here.
