Are PCPs draining your wallet? The hidden costs and risks of financing electric cars revealed

Electric car plugged in charging

Eight in ten drivers finance their new vehicles using PCPs, but are these agreements worth the money, particularly for those thinking about purchasing an electric vehicle (EV)?

Roughly £17 billion in loans were made by financial institutions to car buyers in the year ending in October 2023.

Out of them, one in every five newly sold cars in Britain is an electric car. Some of these, like the Seat Mii Electric, are losing more than half of their value in a year, according to the auto industry. 

This collapse in value is prompting concern among financial experts.

The director of valuations at Cap HPI, Derren Martin, stated that there are numerous causes for the decline in the cost of electric vehicles. 

He told This is Money: “Range anxiety became an issue once more following a number of unfavourable reports surrounding queues of two to three hours over the Christmas period, particularly at motorway service stations.

“Then there was the cost to charge. With prices of electricity having increased and fossil fuels reducing over recent months, it was no longer clear-cut that it was cheaper to charge your EV than it is to fill up your ICE [internal combustion engine] car.

“This all happened at the same time as vastly increased volumes returned to the used market, from registrations starting three years ago.”

However, the value of petrol and diesel vehicles holds up far better, raising concerns that EV prices will continue to fall. 

Currently, salary sacrifice programmes are available to EV buyers, lowering the tax they must pay on the vehicle. The government can alter the regulations at any time and without notice, even though this lowers the cost of the car. 

Customers with PCPs will be impacted by this price drop since the manufacturer bases the final settlement amount on what it believes the car will be worth at the conclusion of the contract. 

An estimated 522,000 of the 651,933 cars sold were financed through PCP agreements. Industry statistics indicate that eight out of ten PCP clients will turn in their car at the end of the term and sign a new agreement rather than repaying the entire loan. 

However, data compiled by MailOnline indicates that consumers who finance their cars with PCPs may be forfeiting thousands of pounds in value. 

Because many of the offers are arranged in a confusing way, comparing deals becomes much more difficult.  

A growing number of customers are enrolling in PCP agreements in the used car market since the lower monthly payments enable the driver to drive a more expensive vehicle than they otherwise could. 

But, with all finance products, there are considerable risks. 

Customers who sign a PCP agreement must pay a deposit, which is typically equal to 10% of the vehicle’s list price. The customer pays a set monthly payment over a period of two to five years to finance the remaining amount. 

But in contrast to a hire-purchase arrangement or a conventional bank loan, the customer is only making partial repayments towards the outstanding debt. 

At the start of the agreement, the manufacturer will agree to offer a minimum value for the car at the end of the contract. If the car depreciates less than this minimum value, the customer will have more equity when signing up for a new deal or pay less to settle the balloon figure. 

What happens at the end of a PCP deal?

  • The customer can hand back the keys of the car and walk away
  • The customer can hand back the keys and sign up for a new PCP deal
  • The customer can pay the balloon payment and own the car outright

What can go wrong?

  • The customer fails to keep up with payments and the car is repossessed
  • The car is damaged or stolen, leaving the customer facing a significant loss
  • The customer drives more than the agreed number of miles during the deal

Why do people sign up for a PCP deal

  • It offers customers a lower monthly payment compared with traditional finance
  • The lower payment allows them to drive a ‘better’ car
  • It also allows them to buy the latest cars every few years 

MailOnline looked into a deal where the Audi e-tron, 95kWh 55 Quattro S-Line Sportback was listed for £61,755. In exchange for Audi contributing an additional £5,000, a buyer opting for a two-year PCP plan had to pay down a deposit of £11,951 on the car. 

For the next two years, the customer will pay £697.01 per month; however, servicing, insurance, and other expenses are not included in this amount. The customer has two options at the end of the term: pay the £34,021 balloon payment or walk away. 

The customer has now paid £30,992 for the vehicle. Nevertheless, by choosing to buy a used car with the same specifications, mileage, and age instead of making the balloon payment, this customer might save £1,222. 

Up to £1,956 could be saved on a Mercedes EQC 500 300kW AMG Line Premium Plus 80k 5dr Auto. 

A person signing up for a three-year deal on a £79,995 Jaguar I-Pace will pay a deposit of £10,999.50 along with £1,032.70 over the term of the contract – a total of £47,122. 

However, the current market value of a three-year-old I-Pace is approximately £25,799; thus, the £32,873 balloon payment is financially absurd as the owner would be carrying a negative equity of more than £7,000. 

On the other hand, a person who chooses a £38,970 Skoda Enyaq on a three-year contract will only pay £18,482, compared to £25,499 for a used car. 

In contrast to the £21,299 second-hand value of a Volkswagen ID.3, the purchaser signing a two-year contract will be responsible for a balloon payment of £17,333. 

In order to purchase a brand-new Tesla Model 3 for £49,990 over the course of two years, a deposit of £11,600 and monthly payments of £766 were required. 

When you compare the balloon payment of £25,995 to the predicted £29,999 cost of the two-year-old counterpart, it looks like a great deal. 

However, over that two-year period, Tesla was charging interest at 9.5 per cent APR, meaning the £49,990 car costs a total of £55,979 – or almost 11 per cent more than list. 

Mercedes, Jaguar, and Skoda were the only three of the seven possible packages that MailOnline looked into that offered zero percent financing. 

Volkswagen and Audi levied interest rates ranging from 4.9% to 6.9%; however, they also contributed a deposit of £3,000 and £5,000, which somewhat offset this expense.

Lexus charged 5.9 per cent, increasing the cost of their £36,970 car to £40,194.  

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