Even though the prices of new cars have gone up in UK in past five years, but car-buying and driving those have become cheaper. Thanks to the financial engineers for inventing new ways of borrowing money, new way of car finance, new deals to attract more customers.
Britons had never before seen such a boom in car-buying and data of 2016 reveals there were record 31.6 billion pounds money borrowing in the segment and the deals offered have become a major concern for Bank of England and the Financial Conduct Authority (FCA) as well.
Let’s find out whether car buyers need to be concerned too.
Earlier car-buying was like going to bank and apply for a car loan. The other way was opting for Hire Purchase (HP) contract. However, in 2016 more than 80 percent of the car finance deals were on the term of Personal Contract Purchase (PCP), which is a fresh idea imported from United States and this has proved revolutionising the borrowing.
Under the PCP method you just rent a car over a period of three years and the payment made during the time is merely finances of the depreciation. After the expiry of the timeframe you get three below choices:
– Purchase the vehicle for its residual value calculated by subtracting the depreciation. It is well termed as “balloon” payment.
– Give back the car.
– The residual value could be rolled over to a new PCP for a new car.
The last option is chosen by most of the car owners and this is the reason lots of new cars are seen on the road. It is similar to the mobile phone contracts under which users are habituated of making a monthly payment for a period of two years mostly and thereafter upgrade the phone.
The same psyche has attracted car buyers too, but on a bigger scale of course. The car-buying is much cheaper than HP in this new method.
In the HP way you need to own the car outright after the end of the contract, but this is not the case in PCP.
However, in the PCP method you can’t make a decision not to use the car after one year as you have bought another model. This will cost you hefty to cancel the deals.
One of the greatest drawbacks of PCP is that it will be tough for you to come out of the cycle of having a new car in every three years timeframe.
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