MOTORING / The personal approach: Good deal? Or just another gimmick? Paul James on the latest way to buy your new car

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The Independent Culture
THE summer sales rush may be over but schemes to shift new cars abound - finance at 0 per cent, 30-day exchange plans, even a GM/Vauxhall credit card. But it's personal contract plans (PCPs) which are most in vogue. Introduced here from the US by Ford in 1991, the company now has 50,000 contracts running and estimates that by 1996 half of all retail sales will be done in this way. Other manufacturers are rushing to catch up. Vauxhall's Choices 1+2+3 and Rovers Select are similar schemes.

So, why so popular? Initially, a PCP works like a hire purchase deal. A new car is selected at the showroom; a deposit paid (20 per cent is common), and an agreement signed to pay monthly instalments for a specified period, usually 24 or 36 months.

The twist with a PCP is that, unlike hire purchase, the amount to be paid off with the monthly repayments is not the total price of the car. At the start of the process a sum is set - the minimum guaranteed future value (MGFV) - that the car will be worth at the end of the contract. This is subtracted from the agreed on-the-road price, along with the deposit, so monthly payments have to cover only the balance plus interest.

On a pounds 12,000 Rover, for example, with a deposit of pounds 3,000 and an MGFV of pounds 5,400, repayments over the two year contract have to cover pounds 3,600 - pounds 12,000 minus pounds 3,000 and pounds 5,400. Interest is charged on both the outstanding balance and the MGFV; in this example, that means repayments of around pounds 236 a month. A typical hire-purchase agreement could be around pounds 100 more.

At the end of the contract the buyer has three options:

1) Give the car back to the dealer and walk away. This is the worst choice. Although the outstanding balance doesn't have to be settled, walking away (using the Rover example) means having paid around pounds 9,000 effectively to rent a car for two years.

2) Buy the car from the dealer for the MGFV. So far, makers have set MGFVs lower than trade values suggest a two year-old car is worth. So buying the two-year-old car is a good deal.

3) Use the MGFV as the deposit for another new car from the same dealer, as in a part exchange. This is the easiest way to take advantage of any increased offer the dealer may make above the MGFV; it is in his interests to bring you into the next deal.

So, where's the catch? First, at the end of the contract the dealer still owns the car. Ownership only transfers on payment of the MGFV. Buying with a bank loan, say, allows you to sell at any time, whether you have paid off the loan or not. With a PCP you can't.

Secondly, PCPs have clauses about the condition of the car at the end of the contract and mileage limits. Limits are negotiable, but exceed them and there's a penalty. BMW's Select scheme, for example, specifies 8.5p for every extra mile.

Thirdly, all the examples given by manufacturers begin with the list or on the road price of the car. But even with recent reductions in dealers' profit margins - down to 10 per cent in many cases - there is still room to negotiate that price downwards.

And finally, there's depreciation. The future values set by the dealers show what they think a car will be worth in two or three years. In even the best cases, that prized new car will be worth only around half its original price - a powerful argument in favour of buying second hand rather than new.

Not every manufacturer has leapt on the PCP bandwagon. Some have relied on more traditional finance schemes and underlying virtues like reliability and quality to sell cars. But the mood is changing. Recent new schemes include Fiat's Preferenza, Toyota's Terms and Mitsubishi's Alternatives, while both Nissan and Honda are considering PCPs for 1994.

This activity shows that, with the current slump in European sales, the pressure to compete with attractive sales schemes, and to deliver on those promises, is increasing. But it's worth bearing in mind that while PCPs may be 'making new cars more affordable', they don't seem to be making them any cheaper.-