Should we keep our electric car at the end of its PCP deal?
Dear Alex,
We got an electric Hyundai Kona three years ago on a four-year PCP contract. We love the car, but in the next year we will have to decide whether to buy it or walk away. I had thought to keep it, but a few weeks ago the dealer told us that at the four-year service the battery box will need changing at a cost of £700. Until this call, I was happy to keep the car, but now I am not so sure because of the balloon payment at the end of the contract and the extra £700. What should we do?
– PF
Dear PF,
I have to admit I'm somewhat stumped by what the dealer has told you. I can't think what they might mean by the 'battery box'.
I unearthed a copy of Hyundai's service schedule for the Kona Electric, but there's no mention of anything that sounds like a battery box.
They can't mean the main traction battery pack itself, because that would cost 10 times as much (and wouldn't need replacing as a matter of course) – and they can't mean the 12-volt battery, as that would be much cheaper.
I suggest calling the dealer – or perhaps Hyundai's Customer Care line – to clarify what they mean, why it needs replacing and whether it's totally necessary. It could be a misunderstanding and it might be that you won't have to fork out the £700 after all.
Either way, I'd still say you should pay the balloon payment rather than give the car back. It's almost always the case that keeping the car makes more sense financially.
The balloon payment is also called the minimum guaranteed future value, or MGFV. As its name suggests, finance companies arrive at this figure by working out the absolute minimum a car will be worth at the end of its term. Then, to ensure that they don't lose money on the deal, your monthly payments are effectively paying the depreciation down to that figure.
But the car probably won't have depreciated by that much. It will probably be worth more, because it won't have reached the minimum possible value unless something catastrophic has happened to the used car market.
In essence, your monthly PCP payments are effectively overpaying the depreciation and building a small chunk of equity in the car. The only way to get that equity back is to pay the balloon payment and keep the Kona.
Otherwise, if you give the car back, the finance company keeps it as profit, on top of what they've already made on the interest on your monthly payments. That's why they love PCPs!
Even if you don't want to keep the car, it almost always makes sense to pay the balloon payment then sell the car, rather than giving it back. You'll almost certainly get more for it than you've spent on the MGFV; what's more, the difference between those two figures goes into your pocket, rather than the finance company's.
Is it still worth doing even if you have had to spend £700 on it? I should think so – because that difference between the MGFV and the car's value will probably be greater. If you're still not sure, though, you can work it out by looking at how much Konas like yours (of similar age and mileage) are selling for on used car sites such as Auto Trader. If the answer is 'much more than the MGFV figure', as I suspect it will be, then your best bet is to keep the car.
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