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What do car buying and hallucinogenic drugs have in common?

Around five or six years ago in the UK there was a problem. New car sales were in steady decline. Then, something magical happened, new car sales started to skyrocket, this despite average new car prices outstripping inflation. Well done us, we have successful supported the redistribution of supply around the car market. Before we came along, car manufacturers were faced with a barrier to sales as there were a bunch of people who couldn’t really afford to buy new cars or liked to buy second hand cars (sensible bastards!). Don’t worry, there was an answer and since its introduction there were five consecutive, steep years of new car sales growth.

The answer is the use of a Personal Contract Purchase (PCP) schemes to buy a new car. This job that many of us have gleefully accepted is to allow new car “sales” to proliferate and borrow (that’s right borrow, not own) a new car for a fixed duration absorbing all that lovely rapid depreciation so a sensible purchaser can then buy a second hand car shorn of all that depreciation we have so happily hoovered.

Compounding our misery, we are nearly always paying for finance for the privilege of occupying this position. If you prefer to save some time, you can stand on a busy street and theatrically swoosh your bank notes into the air for passers-by to collect. This could be more altruistic though so you might end up by accident doing something good with your money.

You purchase something over a period of time, while in the meantime you get to use it like it’s yours. The deals for cars tend to be fairly complex, and what do we know about complexity in this kind of situation? That it is going to be designed to be much more favourable to person who created it than the person who is accepting it (that’s us, the guileless consumer). There are different flavours of PCP for cars but basically they will have similar components.

1. You make an initial payment to the dealer (the percentage varies dependent on the cost of the new car)

2. You makes subsequent monthly payments to the manufacturer for a fixed period of time (typically three or four years)

3. You then make an (optional) final payment (normally a big great whacking chunk of cash around 30 percent of the original cost of the car) to then own the car outright or you can return the car to the dealer and say thanks very much. There are some other options if for example the market price for the car (as assessed by the dealer!) is higher than the final payment you can use this equity to contribute towards another PCP agreement to reduce the overall outstanding you would have to pay on the new car.

Look at this typical example:

By the way at the end of the PCP period there are all sorts of caveats that are imposed such as mileage limitations, condition etc. which if you don’t meet then you will owe even more money to the dealer. This really does just get better and better.

In these cases the optional final payment is comparable to the market value of the car. In reality, this means that you have the same options available to you as anyone else. Anyone can purchase a car of this age, of this condition for the same amount of money as the final ‘balloon’ payment that is part of your deal. Therefore consider that the previous payments have in no way put you in a more favourable position than are available to the market in general.

Therefore the review of whether your participation in the deal is worthwhile is down to what you paid over the four years for access to the car.

In this case you have paid approaching £14,000 for the privilege of driving the car (but not too much, remember the maximum allowable mileage).

If you insist on buying a new car (though I think you may have worked out my opinion on doing this by now), then do it in a more sensible way. You could buy a delivery mileage car (less than ten miles on the clock) and purchase it on a credit card with an extended interest free period. During the equivalent four years (to a PCP scheme), you could perform a balance transfer once during the period to avoid in interest payments.

In this specific instance you would be FIVE THOUSAND POUNDS better off!

Put it this way. If someone were to ask you to borrow the car you already own for ½ an hour and in return would be willing to give you 10 percent of the value of the car for the pleasure, how many people would refuse the offer?


If you would be prepared to spend more than £500 per mile to get the car new rather than with delivery mileage then good luck to you….

What percentage of new cars are currently purchased on these types of schemes?

In the UK in 2016, 82 percent of new cars purchased were done so under PCP schemes. We’re basically saying here that more than 4 out of 5 new cars are ‘purchased’ under a scheme where they’re not really being ‘purchased’ at all.

The initial payment and the massive optional final payment allows the monthly payments to be low to the point where they seem achievable to the average-Joe who has miscalculated his monthly expenditure by not considering the fat tail of unexpected expenditure.

The chart below show how this composition paints the picture of monthly affordability.

The middle section of this graph which is the monthly payments could show anything, it could show a new car from £10 per month, the point is by adjusting the two bulk payments this then looks deceptively manageable and enticing. For the monthly payments to total only 41 percent of the overall cost is of course why they then look so affordable.

The question then is — do the people entering into these deals have any intention of purchasing the car at the end of the period? No is the answer, unless they all of a sudden run into a bunch of money they didn’t want to allocate to car buying in the first place. What’s this, in the real life example I’m using here the final payment is just under £9,000, only £400 pounds less than the total monthly payments. Therefore to have saved up the final payment is equivalent to saving monthly another £200 a month on top of the £199 they are already paying monthly. If they have that spare, then why not buy the car on more traditional hire purchase in the first place?

What’s that you say? Approximately 80 percent of PCP deals conclude with the car being returned. Well quelle surprise! That makes a bunch of sense and therefore we can conclude the following:

If 82 percent of new car sales are undertaken on PCP deals and 80 percent of these result in the final balloon payment not being made then 66 percent of new car sales are not ‘sales’ at all! The ownership of the car stays with the lender until the final payment is made, 2/3rds then of all car sales don’t qualify as sales at all. So instead of there being 2.7m new car sales in the UK in 2016 we can argue that there are only 0.9m new car sales and an extra 1.8m new car leasing arrangements. Is anyone else getting the heebee jeebies about this?!

Go into a car showroom and express an interest in a new car — when they bring up paying for it I bet the salesperson pushes you towards a PCP deal first, why? Because he makes a bunch of commission on it, and why does he make a bunch of commission? Because PCP is the most favorable outcome for the dealer and the least favorable outcome for you.

This all makes perfect sense. New cars are fabulously expensive relative to take home pay. The average cost of a new car in the UK is now around £30,000 (wow that’s a lot!) which if you consider the average salary in the UK is £28,000 after tax and NI, that’s approximately £22,000 take home income. Of course not to say that the people buying new cars are those who are on average salaries, they are probably not.

Until recently when I entered my premature midlife crisis and quit my job I was in the 90th percentile for earnings in the UK and the prospect of spending £30,000 on a car strikes me as absolute lunacy. If I’m not doing it in the 90th percentile, where are all these car buyers (or renters) coming from??

It’s not you is it?

To be continued…….

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