PCP time bomb: save up now to avoid new contract heartache

  • New car PCP instalments have risen dramatically
  • Are you saving enough for your next car deposit?
  • Fail to save enough and a new version of your car may be out of reach when your contract ends

Tied into a PCP finance contract and planning to step into a new one when that ends? Are you sure you’ll be able to afford to finance a similar car next time around? Don’t be so certain.

An entry-level Audi A3 that would have cost you £190 per month at the start of 2017, for instance, would set you back £298 per month if you signed up for exactly the same contract today. And the A3 is not the only car to rocket in price.

That’s because new car list prices have spiralled over 2017, while residual values – how much a car is worth at the end of the finance term – have plummeted in many cases. As a result, the amount financed – the difference between the car’s value new and when you hand it back – has risen markedly, pushing up monthly payments.

Fear not, though. There are several ways you can protect yourself against rising prices. Prepare properly and you should be in a good position at the end of your contract, whether finance prices continue to rise or not.

PCP finance

Tune into BBC Radio 4's Money Box programme – broadcast on Saturday December 9 at 12:00-12:30pm – to hear Parkers explain how to make PCP finance work for you.

PCP finance: don’t bank on equity

Many dealers will sell you a car on PCP with the promise that you’ll have some cash left in it at the end of the contract – known as equity.

The idea is that the car should be worth more at the end of the contract than the amount left to pay, meaning you can put this surplus down as a deposit on your next car. The more equity you can put into your next deposit, the lower your monthly payments will be.

But you can never bank on this; if the value of the car is lower than the optional final payment at the end of the contract you hand the car back with nothing. As residual values have dropped for many cars over the last year – especially diesel models following concerns over emissions – millions of drivers could get less back than they expect.

PCP finance

Get to the end of the term with no equity and nothing saved for a deposit and you’re left at the mercy of the car companies. If monthly payments have leapt since you signed your last contract and you have no extra cash to put down a bigger deposit, will you be able to afford the car you want?

Put money aside for your next PCP deposit

Take control of your monthly payments by saving a little money every month. The more you have saved up to plough into a deposit the less you’ll pay every month.

Just saving £20 per month over a three-year period would leave you with an additional £720 to put into your deposit, which could make the difference between being able to afford the car you want and having to settle for something else.

Want to learn more about car finance? Take a look at the links below:

Putting down a bigger deposit is especially important if the car you’re financing has a high APR charge, as the higher your upfront payment, the less interest you’ll pay.

Stick to your monthly budget

Busting your budget now could make life a lot more difficult when you come to change your car. If you can only just about afford your monthly payments, chances are that you won’t be able to put money aside for your next deposit.

PCP finance time bomb

Should prices continue to increase, you could find yourself unable to get another new car with no leftover cash to bump up your deposit to get the car you want for a monthly payment you can afford.

This doesn’t mean that you can’t get a desirable car now, but you need to choose the right one, to make sure you’re getting a good car for the price. Some models come with far better value finance than others, so doing your homework could really pay off.

Shop around: get like-for-like quotes for different models

You may have your heart set on a specific model, but would you pay a substantial premium for it over a similar rival?

Yes, you may like the styling of the Peugeot 208, for instance, but would you pay £36 per month more for one over a more powerful, more economical and bigger-booted Skoda Fabia?

Not only has the Peugeot rocketed in price from £193 per month at the start of the year to £212 now, but the Skoda is cheaper than both, at a mere £176 per month here and now (all with identical contract terms).

PCP finance time bomb

Over a three-year contract, therefore, choosing the Fabia could save you £1,260. Put those savings aside and you could have your deposit ready for your next contract after another three years.

You could save even more if you went for a £346-per-month BMW 320d M Sport over the Mercedes C 220 d AMG Line, which has jumped from £359 per month at the start of the year to £429 now.

Make the sensible choice and go for the BMW and you could save a hefty £84 every single month on a like-for-like contract. Over the course of the contract that’s more than £3,000 – enough to make a reasonable deposit in its own right.

Shop around: get a better car, pay less – avoid rip-off entry-level models

To get the best deal it’s worth shopping around within model ranges as well comparing rival models.

So don’t just get finance prices for a Volkswagen Golf and an Audi A3 if you’re considering a BMW 1 Series, but compare different versions of the 1 Series too.

PCP finance time bomb

Do this and you could step up from an entry-level, petrol, three-door model to a better equipped, faster, more economical and five-door diesel version – all for less per month.

While the basic 118i SE 3dr would cost you £245 per month, it’s the 118d Sport 5dr – the model with the higher cash list price – that is better value at £231 per month with identical contract terms.

In many cases drab, undesirable entry-level models could cost you more every month than a more desirable, better-equipped model. Visit our roundup of the best mid-spec cars for less than the entry-level equivalent to make sure you get the best deal.

Looking to find out more about car finance? The stories below could help:

*Deals are correct at time of publication. Everyone’s financial circumstances are different and credit is not always available – Parkers cannot recommend a deal for you specifically. These deals are indicative examples of some packages available this week.