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CAR FINANCING | PCP OR BANK LOAN? | WHICH IS BETTER?
5K views
Dec 11, 2022
In this video, I go through an example of a bank loan vs PCP finance to see which one is cheaper. I also take a look at some of the positives and negatives of both forms of finance. Thank you for watching, I hope you enjoyed the video. If you did please make sure to subscribe to the channel for more content like this. This video is for educational purposes only. €50 euro free commissions for Degiro when you sign up using the below link: https://www.degiro.com/?tap_a=56340-8d2ff5&tap_s=1493866-0a10d6&utm_source=TheHeadStartup&utm_campaign=DEGIRO+EU&utm_medium=a&utm_content=hp
View Video Transcript
0:00
There are many things to consider when it comes to deciding on how to finance your next car purchase
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PCP agreements have become very popular. I looked at some stats earlier on saying that over one third of new cars are now PCP agreements
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and that stat was from a couple of years ago so god knows what it is right now
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As with everything there are positives and negatives to going with PCP for your finance
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With the PCP financing you don't actually own the car outright during the term of the agreement
0:27
only at the end of it if you decide to pay the final large optional payment
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So that means you are restricted in that you cannot sell the car during this term
0:35
At the end of the usual three-year term, you have three options. You can either hand the car back, you can buy the car outright with the optional payment at the end
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or else you can enter into a new PCP agreement. What I really want to focus on in this video is what is the cheaper option from a finance perspective
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are you better off going with a PCP arrangement or getting an actual bank loan? If I wanted to get
0:58
this beast of a Toyota Yaris in the morning would I be better off getting a PCP arrangement or a bank
1:05
loan? Let's run through the figures now and see what actually costs less. So the road price of
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this Yaris is €22,070 and for this example that I'm going to use I'm going to assume for both the
1:16
PCP and the bank loan that we put up a deposit of €5,000 so that leaves an amount that we need to
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get financed of 17,070 euro now the APR rates that were being offered by Toyota were 4.9
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for a three-year term then on a five-year bank loan the rates vary from bank to bank but you can
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get roughly a rate of about eight percent APR at the moment so what I'm going to do here in this
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example is compare where we are in both positions after three years and see which has been cheaper
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So these were the PCP terms as I was saying here the road price was 22k we paid a 5 deposit and we needed to get 17k financed that worked out as a monthly payment of 262 euro and as we said this is over three years and it has an apr of 4 so that leaves a cost of credit of 1 972 euro at the end of the three year
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term you have the option of buying this car then at a price of 9 482 euro if you want it as well
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you could just hand the car back and then pay nothing more. For the bank loan then as we said
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we need to finance 17,000 euro so I've put an interest rate there of eight percent hopefully
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maybe you can get a rate slightly better than that but they are pretty much the going rates
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in Ireland here at the moment so this is over five years as I said and this works out as a
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monthly payment of 346 euro so as you can see here the monthly payment is much higher with the bank
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loan compared to the PCP agreement which was only 262 euro per month. So straight away you're going
2:54
to be paying more per month on your bank loan. So now I just want to compare the situation after
3:00
three years. So for both the PCP and the bank loan we put up a deposit of 5k and the payments we made
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so far up to the end of the three-year term were all of those monthly payments. So for the PCP it
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added up to nine and a half thousand and for the bank loan which is higher it added up to 12,460
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so there are extra payments of 2,900 made on the bank loan. To own the car outright at that point
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on the PCP you had an option to pay 9,482 euro that's to buy yourself that car at the very end
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of the PCP agreement so that brings you up to a total cost of 24,042 euro if you're trying to buy
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the car through PCP. If we compare that to the bank loan then after three years there was €7,653
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left on the loan so if at the end of the three years you decided to pay off all that loan in one
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go your total cost would have ended up being which ended up being more Essentially all of this difference is down to the higher apr rate on the bank loan which was eight percent versus the pcp rate of 4 percent
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so that is really what was causing the difference here and for my example here as well i'm assuming
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that there has been no extra penalties or charges for poor condition of the car or going over on
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your mileage so this 24k figure here for the pcp could be higher if you get stuck with some penalties
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if you did get stuck with a few hundred quid it would definitely bring the cost of both of them
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a lot closer a lot of people may be happy to pay that extra few quid if it means that they actually
4:37
own the car outright by getting the bank loan another very important thing to have a look at
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here is the equity left in the car at the end of three years so let's say for example this yaris is
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actually worth 11 000 euro at the end of three years so that would mean there's equity left in
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the car meaning the value is greater than the cost that you have left to pay on it so what does it
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mean to have equity on your car in terms of a pcp so when you have equity left so this car for
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example in the pcp agreement had equity of 1519 euro which was the difference between the value
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of it on the market and the optional final payment amount of 9,482. Out of the three options that you
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have at the end of a PCP agreement the worst option you can possibly take is to just hand back the car
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because you're going to lose that 1,500 of equity. You would be better off if you could get the money
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together for the 9,482 then you could sell the car on the market for 11,000 and get your 1,500
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quid. Another option that you will have is which a dealer will probably suggest is to use this equity
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that you have left in the car and put it towards your next PCP agreement
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So that $1,500 can go in as your new deposit. There is also a potential to have negative equity though
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This is where your final payment that you have to make is actually more than the market value of the car I just want to talk about one risk that I see with these PCPs is if you don have that 9 euro at the end of three years
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you're kind of stuck between a rock and a hard place you have to either enter into a new PCP
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agreement or else you have to hand the car back and lose out on the 1,500 euro equity that is
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left in it and also if you haven't been saving up a bit of money over the three years as well
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you won't have anything to put forward as a deposit for your next PCP agreement and that
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will mean you will be end up paying higher monthly payments every month. So you could easily end up
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in a cycle of getting caught in these PCP agreements one after another. I'm sure you could
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also try and get a loan at this point and pay off that 9,482 euro as well just if you were really
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stuck but a lot of people probably just take the easy option and go into the next PCP agreement
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and start paying higher payments and the cycle can kind of continue. So my summary of all of this
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has been pretty basic and it will change if you have different APR rates for different loans and
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different PCP agreements so you have to take that into account but generally bank loans will have
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higher monthly payments and will be more expensive up to the three-year mark due to the higher APR
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on bank loans. The car is euros worth a bank loan and can be sold at any time unlike a PCP so you
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definitely have a lot more flexibility and as I was saying if you can't get enough money together
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at the end of the PCP to pay the balance owed you either have the option of walking away and losing
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the potential equity left in the car or also ending up in another PCP agreement with higher
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payments. So that is pretty much it for my video on this today I would love to know your thoughts
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on it when you go for car finance what do you go for yourself do you go with a bank loan do you go
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with a higher purchase do you go with a PCP. If anybody would like to see me do more videos on
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car financing then please let me know in the comment section. I could do some videos on higher
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purchases versus bank loans and other things like that. So thanks very much for watching. I hope you
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enjoyed the video and if you did please make sure to subscribe so you can keep up to date with my
8:01
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