With a growing majority of car buyers taking out loans or personal contract plans (PCPs) to cover the cost of their new electric car purchase – the days of a deal for cash seem to be gone – it’s more important than ever to understand how the various finance packages work.
Karen Kennedy, Bank of Ireland head of customer development and innovation, says many car dealerships today rely on PCPs as a method for consumers to finance the purchase of a new vehicle.
“However, there is often an air of mystery as to how they work and it is advisable that car buyers understand fully what they are committing to,” says Kennedy. “Car loans remain a popular method for buying a car but there is also the option of going for a hire-purchase plan too, in order to ensure a simple but effective path to ownership of a vehicle.”
The simplest and easiest way to finance a new EV purchase might well be to get a personal loan from a bank or credit union. With current interest rates, this will probably be the most expensive, from the point of view of monthly repayments, but it is the most straightforward – you own the car outright from the day you buy and you simply pay off the loan month by month as you go. There are no complications involved, it’s just pricey.
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That cost is why the PCP finance package has become so popular. A PCP defers a certain amount of the car’s price to the end of the finance agreement and this cost is expected to be covered by the car’s future second-hand value, which the car maker and the finance provider effectively guarantee – which is why it’s known as the guaranteed minimum future value (GMFV).
Indeed, the whole point of a PCP is that the GMFV is actually expected to be slightly less than the car is actually worth at the end of the finance plan, which usually runs for three years. That extra value over and above the GMFV is your “equity” in the car, and this can be used as the deposit for your next car, assuming you want to roll your agreement over to a new car. The other options are simply handing back the car and walking away, or paying off the GMFV and owning the car outright.
It’s that GMFV that allows car makers and dealers to say that they’re protecting the second-hand value of your car.
“PCP from BMW Financial Services Ireland is a ‘smart choice’. The biggest benefit for the customer is that BMW Group effectively underwrites the [predicted] future value of the car, meaning the customer is fully insulated against any potential drop in used car values in the future. The upside for the customer is they retain the additional equity; any downside is absorbed by BMW Financial Services,” says Brian Merrigan, BMW Ireland’s head of financial services.
“For 15 years BMW Financial Services Ireland have been offering PCP as a method of financing a new or used BMW or Mini. Over this time the vast majority of customers have been able to successfully trade in these cars, part exchange them and finance the next purchase with some level of preserved equity. A number of customers have decided to keep their car after the PCP term has run its course – in these cases we have been happy to refinance the value of the vehicle [GMFV] final payment over another two or three years where the customer finally pays off in full and gains ownership of the car.”
That said, there’s also a big incentive to buy a new electric car on a PCP or HP deal because, as Emma Toner, marketing director for Opel Ireland, explains: “The majority of motor distributors and franchise dealers in Ireland offer keen, subsidised hire purchase or personal contract hire finance rates to drive customers’ monthly payments down.
“Opel currently offers a zero per cent hire-purchase rate, or a 2.9 per cent PCP rate. This is a strong customer advantage today given finance interest rates have increased substantially in recent years. These subsidised rates cost customers much less interest over the course of the agreement than a personal loan taken outside a subsidy scheme and the difference could mean hundreds less in repayments for a customer.”
Audi, too, offers a range of finance options, with Audi Ireland head of marketing and customer experience Deirdre Schwer telling The Irish Times: “Audi offers a number of ways in which to finance your electric vehicle purchase based on suitable monthly instalments and ownership options at the end of contract.
“A PCP agreement, available to both personal and business customers, offers a fixed monthly repayment throughout the term of the contract, with a GMFV on your vehicle at the end of your finance term. Hire purchase is also available on EVs and assists customers in maximising their budget by offering flexible terms of between one and five years, fixed interest rates for the duration of the agreement and set repayments.”
However, there is an element of risk involved in a PCP, as you’re effectively betting against the car market three years down the road. This has become an issue for some EV owners in the past year, as second-hand EV values have fluctuated dramatically, in part because of price cuts to new EVs, and in part because the broader second-hand market doesn’t yet quite trust the technology. This has led to weaker EV second-hand values, which in some cases has eaten into the “equity” of the car, leaving some owners out of pocket when it comes to trade-in time.
In some ways, this means hire purchase – where you make regular repayments every month and own the car outright at the end of the loan period – can make more sense for EV buying, as it means that while you’re more exposed to the volatility of the second-hand market, it also means that you have the option of keeping the car for longer and riding out the storm of used EV values.
Will those used EV values go up? Yes, they almost certainly will. Used electric car sales are still small beer at the moment but they are growing, and some of the cannier car buyers are realising that depressed second-hand EV values makes for some astonishing bargains.
A very young EV, with plenty of its battery warranty left to run, and with low mileage, can be snapped up for a bargain price right now, which is encouraging for second-hand buyers. As more and more people cotton on to this, demand for used EVs will rise, and so too will prices.
