PCP For Finance Idiots

So what is PCP ? Imagine you want to borrow £10,000 to buy a bike in the normal way. For simplicity, lets ignore the deposit for now, and imagine it’s interest free.

 

Ducati Scrambler, Yamaha MT-09 Tracer PCP

 

So over three years your 36 payments are £278 a month. At the end of three years you sell the bike for the market value, say £6000. So you’ve borrowed £10,000, swallowed the monthly payments, and then gained £6000 at the end.

You’ve effectively spent £4000 yet you’ve been paying monthly payments on £10,000. This is where PCP comes in. Instead of borrowing the full £10,000 and then getting a load back at the end, with PCP your monthly payments just cover the £4000 depreciation, so are much lower. In this interest-free example they would be £111 a month. The downside to these low payments is that after three years, you don’t own the bike. You’ve effectively been renting it.

 

2015 Yamaha YZF R1 PCP

 

So, you can either hand it to the dealer and walk away, or pay off the remainder and own the bike (in our example that’s £6000), or pick a new one and start another PCP. The complications have been left out of this explanation. Firstly, interest. With PCP you pay interest on the whole amount (£10,000 in this case) even though you repay just depreciation.

So it’s important that the rate is competitive. Secondly, the value after three years has to be agreed when you take out the PCP. It’s a guesstimate so that the lender can calculate the depreciation and therefore the monthly payments.

Because this GFV (guaranteed future value) is a guess, lenders err on the side of caution, usually knocking 20% off the predicted value to come up with the GFV.

So in our example, the GFV would be £4800 (making the payments £144 a month). The plus side of this is that when you hand the bike over, you get any difference between the actual value and the GFV – £1200 in our example – to put down as a deposit on your next PCP.

 

Who Gets What Out Of PCP ?

 

Buyers

 

We get a low deposit and low monthly repayments. But we don’t get to own the bike unless we stump up a hefty lump sum at the end of the loan period. Also, the interest rates are almost always higher than on a straight forward loan.

It doesn’t make financial sense if you plan to keep your new bike longer than three years, and piling on loads of extra miles can add to the costs too.

 

Manufacturers

 

They sell more new bikes and have a way of keeping customers coming back on a regular basis. Which, when it comes right down to it, is
the name of the game. You can swap between brands after your PCP finishes, but most customers don’t.

 

Dealers

 

More new bike sales and because they are on finance they tend to sell more accessories and kit as part of the deal. And at the end of the PCP customers walk back through the doors.

 

Finance Houses

 

They get interest on the full price of the bike, so they’re happy.

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