Why is PCP so expensive in 2024?
Why is PCP so expensive in 2024? Take a look at the changing landscape in car finance and how it has changed over the last 3 years.
Share This Post
take a look at the different reasons why pcp is now more expensive
The UK automotive finance landscape has undergone significant changes over the last few years, with a particularly notable increase in the cost of Personal Contract Purchase (PCP) deals. For enthusiasts of performance cars, this rise has been even more pronounced, driven by various factors that have compounded in recent years.
What is PCP?
For those unfamiliar, PCP is one of the most popular methods of financing a new or used car in the UK. Unlike traditional car loans, PCP allows drivers to pay lower monthly instalments in exchange for a large final payment, known as a balloon payment, if they choose to keep the car at the end of the contract. Alternatively, customers can return the vehicle or trade it in for a new one. Over the last decade, PCP has been a go-to method for many looking to own premium or performance vehicles, thanks to its flexibility and relatively affordable monthly costs.
The Surge in PCP Costs for Performance Cars
Over the past three years, however, the affordability that made PCP so attractive has begun to erode, particularly in the performance car segment. On average, monthly payments for performance vehicles through PCP deals have increased by 15-20%, depending on the make and model. Several factors have driven this upward trend:
1. Rising Interest Rates
In 2021, interest rates were at historic lows, making PCP deals highly affordable for consumers. However, by 2023, the Bank of England had raised interest rates multiple times to combat inflation, and these increases directly impacted car finance rates. Higher interest rates mean that monthly PCP payments have become significantly more expensive, as finance companies pass on the costs to consumers.
2. Inflation and Cost of Living Crisis
The cost of living crisis in the UK has affected almost every sector, including automotive finance. Inflationary pressures have increased the cost of car production, logistics, and raw materials, driving up the prices of new vehicles. For performance cars, which often rely on advanced materials and technology, these increases are even more significant. Higher car prices directly translate to higher PCP payments.
3. Residual Values and Depreciation
One of the key factors in determining monthly PCP costs is the car’s expected residual value at the end of the contract. Over the past few years, the residual values of many performance cars have fluctuated due to market volatility. While some models have retained value well, others have depreciated more rapidly, leading finance companies to adjust their deals and increase monthly payments to mitigate risk.
4. Post-Pandemic Supply Chain Issues
The global semiconductor shortage and disruptions caused by the COVID-19 pandemic have led to longer lead times and higher production costs for many car manufacturers. This has hit performance cars particularly hard, as they often require specialized components. Reduced availability of these vehicles has created a supply-demand imbalance, pushing up prices, which in turn impacts PCP deals.
Real-World Example:
One of the owners of Mod Central Mark, has had first hand experience in the rising cost. In 2021 Mark bought a B9 Audi S5 2019 the on the road cash price at the time was £38,000, like most of his cars he purchased this using PCP as he knew he wouldn’t be keeping it for more than 2 years and at the time got a great deal of £444pm. Fast forward 3 years later and he has now sold the S5 and is looking at jumping into a 2 year old (2022) M240i, Cash price of the car is roughly the same as what the S5 was 3 years ago (£38,000) but the monthly cost has now risen to £497pm which is a 12% increase.
What Does This Mean for Consumers?
For many, the rising costs of PCP deals make it harder to justify financing. As monthly payments increase, consumers may find themselves considering alternative financing methods. Additionally, the volatility of residual values makes it more difficult to predict the final balloon payment or the trade-in value of the car at the end of the contract. We advise people to do their own research and finding a vehicle that holds it’s value is obviously the best option but is becoming increasingly difficult.
Conclusion
The past three years have seen a sharp rise in the cost of PCP deals for performance cars in the UK, driven by a combination of economic factors, supply chain disruptions, and changing regulations. While performance car enthusiasts may feel the pinch, it’s important to stay informed and consider all financing options before making a decision. As the automotive market continues to evolve, so too will the dynamics of PCP, making it essential for consumers to adapt to the changing landscape.
Find you next car today! Or if you are looking for your next modification check out our store.