Trying to understand UK PCP deals on motorcycles from a Canadian perspective

I’ve been trying to understand this since reading the
advertising, um, I mean buyer’s guide in BIKE last year.

I’m trying to get a handle on PCP financing that seems to be popular in the UK right now. If you’re going to buy a Kawasaki Z1000 with ABS in the UK, you’re looking at a price of £10,389 ($17,453CAN). The on the road price in Canada is about $16,000, so you’re already almost $1500 ahead, but cost of borrowing is where I get really confused.

If you PCP (personal contract purchase) you’re paying a £2500 ($4200CAN) downpayment and then £147 ($247CAN) per month for 36 months. At the end of that time you’ve got nothing, all while paying 5.9% interest and having to ride the bike under mileage and keep it pristine to keep your investment intact.  You’re also hit up for financing paperwork fees.  If you go over mileage or the bike is in any way less than mint when you return it you suffer additional costs. I imagine the same goes with any farkling you might want to do – don’t. When you hand it back you’ve paid $13,092 Canadian dollars in interest and what basically resolves itself as rental costs; you own nothing. That’s when they ask you if you want to do it again with another bike or now pay a balloon payment equal to the current value of the bike (assuming it’s in perfect shape).

If you buy the same bike in Canada and put the same amount down, you’re looking at a monthly payment of $348 Canadian (£207), and at the end of the 36 months you own the thing. There are no mileage restrictions, no worries about keeping it stock and perfect and if it is in good shape you’ll have spent about $550 in interest and have a vehicle that UK Kawasaki says is worth £3628 ($6095CAN).

The pure costs of borrowing in the UK would be the down payment plus the monthly interest costs. That’ll be £2500 down payment + £465 in monthly interest, all for the favour of giving you this great deal. The pure costs of interest on the PCP deal is £2965 ($4981CAN). The amount of interest you’re paying to own (rather than borrow) the same bike in Canada is $460.

The context of borrowing in the two countries is quite different. The UK happily followed the US down the rabbit hole that caused the 2008 financial crisis by deregulating banks. That never happened in Canada where interest rates and the cost of borrowing has always been held to reasonable standards. Canadian banks still make huge profits (they now own a number of US banks that crashed in 2008), but they don’t break the financial system in the process and people who live here aren’t subject to the ridiculous costs of borrowing that British people seem to think reasonable.  I frequently see ads on UK TV for credit cards with interest rates that would be illegal in Canada.

With that in mind, maybe throwing nearly five grand Canadian to borrow a bike for three years (that’s $139 a month just in borrowing and rental costs!) makes sense, but it sure doesn’t from this side of the Atlantic.

I’m also left wondering what a flood of lightly used bikes will do to the marketplace in the next few years.  In classic short term financial thinking it looks like PCP will flood the market place with short term ownership and then flood the market again with bikes people couldn’t afford in the first place.  Won’t this eventually hurt new bike sales as dealers become swamped in returned PCP bikes?  Maybe the idea is to return the bike and the go looking to get a massive discount on it when you show up a week later and they don’t have enough room on their lot to hold all the PCP returns.

I’m starting to see why the UK found keeping up with the EU too difficult to continue.  They seem to have a very loose grasp on how marketplaces work and seem determined to ignore anything like sustainability.  I’m heading over there in a couple of weeks and enjoying a great Canada/UK exchange rate thanks to their wobbly economic choices.  I’m curious to see if I can get a first hand look at what this approach to bike selling is doing.

UK Kawasaki’s PCP calculator

Canadian Kawasaki’s offer on the same bike…

Cost of borrowing on Canada Kawasaki’s 36 month financing offer…

from Blogger