Personal Contract Purchase (PCP) is a popular way of financing a car purchase in the UK. PCP allows you to drive a brand new car without paying the full purchase price upfront. Instead, you make a series of monthly payments over an agreed period of time. At the end of the agreement, you have the option to either hand the car back to the dealer, pay a lump sum to own the car outright or part-exchange the car for a new one.
PCP is a form of hire purchase (HP) agreement, which means that the finance company owns the car until you make the final payment. This means that you are not the legal owner of the car until you have paid off the full amount owed, including any interest and fees.
The monthly payments are calculated based on the difference between the purchase price of the car and its predicted resale value at the end of the agreement (known as the Guaranteed Minimum Future Value or GMFV). This predicted resale value is calculated by the finance company based on the expected mileage and condition of the car at the end of the agreement.
For example, if a car has a purchase price of £20,000 and a predicted resale value of £10,000 at the end of the agreement, the finance company will only require you to pay the difference between the two figures, which is £10,000. This amount is then divided into monthly payments over the agreed period, typically between 2-4 years.
The amount of monthly payments can be reduced by putting down a deposit at the beginning of the agreement. The deposit amount varies depending on the car and the finance company, but typically ranges from 10-30% of the purchase price. The larger the deposit, the lower the monthly payments will be.
At the end of the agreement, you have three options:
- Hand the car back: If you decide to hand the car back, you will have nothing further to pay, as long as you have kept to the agreed mileage and the car is in good condition.
- Pay the GMFV: If you want to keep the car, you can pay the GMFV and the car will become yours. This is typically done by refinancing the outstanding balance with a new loan.
- Part-exchange the car: You can use the equity in the car (the difference between the car’s value and the outstanding finance) as a deposit on a new PCP agreement. This is known as a “part-exchange” and is a popular option for people who want to drive a new car every few years.
It’s important to note that there are some restrictions with PCP agreements. The most significant of these is the mileage limit, which is usually between 8,000 and 12,000 miles per year. If you exceed the agreed mileage, you will be charged an excess mileage fee at the end of the agreement. This fee can be quite high, typically between 5-15p per mile, so it’s important to be realistic about how much you will be driving the car.
Another restriction is the condition of the car. The car must be returned in good condition, taking into account normal wear and tear. If the car has any damage beyond what is considered reasonable, you will be charged for repairs.
PCP agreements are a popular way of financing a car purchase because they offer lower monthly payments than traditional hire purchase agreements. This is because you are not paying off the full purchase price of the car, only the difference between the purchase price and the predicted resale value. This means that you can drive a more expensive car for less money each month.
PCP agreements are also flexible, as you have the option to hand the car back or keep it at the end of the agreement. This gives you the freedom to choose the option that suits your needs and budget best.
However, it’s important to note that PCP agreements can be more expensive in the long run compared to other forms of car finance, such as hire purchase or a personal loan. This is because the interest rates on PCP agreements can be higher, and you are not paying off the full purchase price of the car during the agreement.
It’s important to compare the total cost of the PCP agreement, including any fees and interest charges, with other forms of car finance to make sure you are getting the best deal. You should also be aware that if you decide to hand the car back at the end of the agreement, you will have nothing to show for the monthly payments you have made.
In summary, Personal Contract Purchase (PCP) is a popular way of financing a car purchase in the UK. It allows you to drive a brand new car without paying the full purchase price upfront, and offers flexibility at the end of the agreement. However, it’s important to be aware of the restrictions and potential costs involved with PCP agreements, and to compare the total cost with other forms of car finance before making a decision.