Personal Contract Purchase (PCP) Overview
Personal contract purchase (PCP) is a flexible car financing option that can offer lower monthly payments than a personal loan or hire purchase (HP) car finance agreement. It’s a loan to help you buy the car you want. But it differs from a normal personal loan because you don’t have to pay off the full value of the car which means it could be a good option for you if you like to change your car more regularly.
PCP finance gives you the choice of owning the car at the end of the contract by paying the balloon amount or trading it in. PCP splits the price of the car into affordable chunks; a deposit, monthly payments, and an optional final payment. You also have until the contract ends to decide whether you want to buy the car or not.
With this financial product, you must be aware that the PCP the loan is secured against the car and therefore if you fail to keep up the repayments, you could lose the vehicle.
How does PCP finance work?
PCP can be broken into three key parts:
The deposit
This is usually for around 10% of the car’s RRP.
The amount to borrow
With PCP the amount you’ll borrow is determined by the lenders prediction of how much the value of the car will drop over the term of the deal (usually 24 or 48 months), the lender will also subtract the deposit from this amount to give them the total amount you’ll owe. You’ll then make monthly payments including interest.
The balloon payment
Agreed at the start of your deal, this is how much the dealer thinks your car will be worth when your deal ends. It’s also often referred to as the Guaranteed Minimum Future Value (GMFV). You can either choose to pay it and keep the car, trade your car in for a replacement and start a new PCP contract, or give the car back and there won’t be anything to pay, providing you’ve honoured the terms of the agreement and the car isn’t damaged.
What Are the Benefits Of A Personal Contract Purchase?
- 1Monthly payments on a car financed by PCP are usually lower than if your car is financed by a Hire Purchase agreement.
- 2If you decide not to buy the car, you can simply walk away when you’ve made all the payments.
- 3Similar to PCH, you can drive away a new or used car every few years (dependent on the chosen term) without worrying about selling it on.
- 4
If the car is worth more than the Guaranteed Future Value then you can use that equity towards a deposit on a new car.
At The End Of Your Agreement
You will then have three options:
Return – Simply return the car the back to the lender
Retain – Keep the car by paying the optional final payment
Renew – Trade it in for another car
For a quotation, help, or advice contact us and ask to speak to one of our Auto Experts.
What Should You Consider When Opting For PCP?
- 1
If you want to buy the car you will need to pay your final balloon payment.
- 2
You will need to agree on a mileage allowance at the beginning of your contract and there may be excess mileage charges if you exceed this.
- 3You won’t be able to sell the car without settling the finance.
- 4
You won’t own the car until you have made all of your repayments, the final balloon payment, and option to purchase fee.