Personal Contract Purchase (PCP) is offered by nearly every car manufacturer in the UK, and is currently the most popular car purchase product in the country. It is particularly credited with the boom in new car sales. According to the Finance & Leasing Association, 74.2 per cent of new cars in 2013 were sold to private owners using credit, the majority on PCP agreements.
What is PCP?
Personal Contract Purchase, (also known as Personal Contract Plan), is essentially, a lease agreement. It is similar in principle to HP in that you pay a deposit, a fixed rate of interest and monthly payments usually over 12 to 48 months.
However, where PCP differs from HP is the fact that the initial deposit you can put down is typically about 30% of the total price of the car, and the terms are substantially lower because your monthly instalments are only paying off the depreciation of the car rather than its actual value. Note that you are borrowing the exact same amount of money in each case.
With HP, you own the car at the end of the agreement without having to make any further payments. At the end of the PCP agreement, you have 3 options:
- You can return the car to the supplier and simply walk away without any obligations. This option costs nothing, unless you’ve gone over an agreed mileage or returned the car in poor condition without any proper servicing. In either case there will be financial penalties to pay. For example, say your mileage allowance is 6,000 per year; the penalty for exceeding that is 14.9 pence per mile. If you returned the car after three years and have 30,000 miles on the odometer, you would have to pay a £1,788 penalty. If halfway into your PCP agreement you are exceeding the agreed mileage, it would be better to readjust your annual mileage instead of waiting to pay the penalty at the end of the agreement. Note that this will mean increased monthly payments and an adjusted GMFV.
- You can choose to buy the car outright by paying a lump sum – also known as the Guaranteed Minimum Future Value (GMFV). You would need to take out a personal loan to pay this off, as it cannot be financed. Note that if you are buying the car outright, any excess mileage you have incurred on the car will be irrelevant.
- You can part-exchange or trade in your car for a newer model. If your car is worth more than the GMFV, then you can use any of that extra as deposit towards your next car.
Guaranteed Minimum Future Value (balloon payment)
If you choose to keep the car, it means you’ll be making a final “balloon” payment, which is the car’s guaranteed minimum value, which is set at the start of the agreement. Every car sold through a PCP has a guaranteed minimum future value (GMFV) set by the finance company which is a forecast of the car’s value after depreciation. The finance company guarantees that, subject to certain conditions, the value of your car will be worth at least the same as the outstanding amount.
This value is based on various factors, including the specific car make and model, the length of the loan, any features or accessories, the anticipated mileage as well as the car’s projected retail value. Your deposit and monthly payments are paying off the difference between the initial buying price and this predicted value. If you exercise this buying option, you can continue to run the car, or you can sell it and pocket any equity above the GMFV that you have paid back to the finance company.
If you’re trading in your car, any GMFV equity can be used as deposit towards its replacement. However, if your car has gone into negative equity where it is worth less than the replacement you want to get, you will have to make up the difference. For example, if you have a GMFV of £10,000 but the replacement you’re interested in has a price of £12,000, you will have to pay the £2,000 difference for its replacement.
Note that any PCP agreement comes with a 14-day right to cancel without penalty from the date the contract was activated. Any deposit you make, however, is non-refundable. Nevertheless, you should always check the fine print on any offer to make sure you don’t get caught out by any specific terms and conditions.
Go for PCP if you can say YES to 1 of the following:
- You want lower monthly payments.
- You like the flexibility of options at the end of the agreement.
- You want to drive the latest model every few years.