Taking a PCP over a longer period than you plan to keep the car for

Okay, so I'm looking at taking an Evoque on a PCP whilst trying to keep the monthly cost reasonably low. One of the suggestions that has come from a LR dealer is to take the car over a 4 year period with the intention of keeping the car for 3.

This makes enough sense to me; LR appear to go for a fairly low balloon whilst residuals seem to be very strong (so far at least), so that makes reasonable sense to me. However, he also made the following suggestion (paraphrased):

Quote:Cut the annual mileage down to next to nothing so that the monthly fee is lower, as it won't matter if you hand the car back before the full term of the agreement is up.

Presumably though, it will matter in the sense that the GMFV will be much higher and therefore any equity will be reduced (possibly down to nothing), which isn't ideal. Right?

What I also can't get my head round is the fact that I could theoretically base an agreement on 10,000 miles (over the full term), do 200,000 miles and then avoid any massive penalty fees by handing the car back a month early. Why would a finance company leave themselves open to this kind of thing?

I'd appreciate some sense from those more experienced in the nuances of PCP than I.

Thanks!

We do have a couple of car brokers who sponsor the forum and both also arrange finance, try contacting either of them and they should be able to explain in simple words what it means.

My understanding is that regardless of the contract if you go over the contracted mileage of the period, then at the end of the period or when you want out the excess mileage will be levied UNLESS you just walk into a Land Rover dealers and throw the keys back at him and tell him the car is all his, but then you also loose any equity you have in the car by handing it back. They've got you any which way!

Taking the car over 4yrs rather than 3 will keep the monthly costs down but will also increase the overall cost with increased interest.
If you have low equity to put in the car and you can stomach the lack of it at the end then a PCP is ok.

One thing I did was compare the overall cost of PCP v Personal Loan. The benefit for the finance company is that you'll be financing a large portion of the car, the benefit for you is that you can keep monthly costs low, but remember there's no free lunch. Low monthly costs equal not much equity at the end.

I posted some thoughts on PCPs here

http://babyrr.com/forum/thread-6790.html

My last Evoque Dynamic Lux was on a 5 year PCP & I put around just over £5000 deposit down. I sold it & paid off the loan after 10 Months due to a good offer. Despite obvious interest charges I still walked away with a cheque for just over £6000.

My present Evoque is on a 4 year PCP (they don't do 5 now) & I put £5000 down. The salesman knows I won't have it 4 years & so do I lol. I put 10,000 miles down, 4 Months in & I have only done approx 2400.

Thanks chaps. I'm fairly comfortable with the interest implications; my main concern is surrounding what the dealer suggested re: the mileage being irrelevant in the event of changing the car early.

Effectively, and I've re-read the email he sent me in this respect, he's saying that when coming up with a settlement figure, mileage doesn't come into it; only what's been paid / is left to pay and rebate any interest. But presumably somewhere in there has to be some consideration for either the actual or theoretical mileage right?

I think the mileage is calculated pro-rata IIRC.

I'm pretty certain the pcp contract would stipulate certain conditions such as going over the quoted mileage eg you will have to pay x pence per mile each mile you go over , in a similar way to a hire contract. Depends on the car, the more prestigious the car the more you have to pay per mile.

My limited understanding is this - already waiting to be shouted down lol.

If you keep your car for 4 years, you can return it (without penalty providing you haven't exceeded the pre-agreed mileage limit), clear the final payment (or re-finance it) or trade it in (if your settlement figure is more than the trade-in figure, you have to put your hand in your pocket, vice versa, you've got some money to put into your new car).

Going back to your theory of agreeing 5k per annum at the outset and doing 200k and handing it back a month early. If you get an early settlement figure, it will be the same whether or not you've got 20k on the clock or 200k on the clock as it will be based on the finance outstanding on the car, not what it is worth - let's say they quote £20,000.

If you try and trade in a car with 20k on the clock after 4 years, it might be worth £25k (just hypothetical figures), you owe £20k so you're left with £5k to put into your new car. If you try and trade in the same car with 200k on, you'd still have to pay the finance company £20k but the dealer might only offer you £10k for it so you'd have to give the dealer your 4 year old car, pay the finance company £10k and then find the deposit for your new one.

All figures are ficticious but I hope that they give some sort of illustration.

I've never thought this theory through but a Jaguar Salesman recently told me that you should put the minimum deposit down and keep your monthly payments high. The theory being that if you put £10k down at the outset, you'll have nice low monthly payments but the car is not going to be worth £10k more then the GFV in 3/4 years time. Assuming your replace your car, you will be forced either to put your hand in your pocket the 2nd time around to beef up your deposit and maintain your low repayments or you will be stuck with a low deposit and have to find larger monthly payments going forward.

Now, obviously, if you put less in, there is more financed and therefore interest is higher - we didn't buy so I never got around to working out whether there was method in his thinking or if it was just another crafty salesman talking.

The salesman is correct, if you take your car back early, one year or one month they will only give you a trade in price for the car. Then they will settle the finance for you and any money left in the car is your deposit. The mileage only comes in to play if you go full term and if you go over the agreed Mileage you have to pay the agreed penalty.

I think if you need to ask such questions then you cannot really afford the car. Best to buy something cheaper so you don't have to worry about being financially high and dry!