How does PCP work?
A variation of a Hire Purchase agreement, a PCP is a finance plan where you pay a deposit followed by fixed monthly instalments over an agreed period, followed by an optional final payment. It allows you to spread the cost of the car over a period of time and could be the right finance option for you if you like to change your car regularly.
The future value of the car is calculated at the start of the agreement and this value is then deferred until the end of the agreed period. Usually referred to as the Guaranteed Minimum Future Value (GMFV) it is calculated using a number of factors. These include how old the car will be at the end of the agreement and how many miles it is expected to have covered.
There is in-built flexibility with a PCP plan. At the end of the agreed period you can decide whether you would like to own the car outright, (which you can do by paying the deferred value (GMFV)), or return the car to the lender and enter into a new car finance agreement. At this stage for instance, you may wish to change car make and model.
When the Agreement Starts
- The amount you want to borrow, less any deposit payment and the value of any car you are part-exchanging is agreed upfront.
- Your application for finance is then submitted to the relevant motor finance company and, when you pass their checks, the lender will pay for the car on your behalf.
- During the term of the agreement, your monthly payments will cover the full price of the car plus interest, minus the guaranteed future value of the car.
What happens at the end of the agreement?
- You can choose to pay the guaranteed future value in full and own the car outright, or
- Hand back the keys and walk away with no further obligation, or
- Use the car as a trade-in by using any equity as a deposit for a new finance agreement. This would happen if the actual market value of the car at the end of the agreement is higher than the guaranteed future value. You may choose a completely new brand of car at this stage.
- In the event that you wish to hand back the car, an excess charge will be applied if the forecast mileage (agreed at the start of the contract) has been exceeded or if car is in worse condition than agreed.
It should be possible to fully or partially settle a PCP agreement before the planned end-date, but the specifics of this should be verified with your lender as each finance company may have different operating procedures.
Advantages of Personal Contract Purchase
- Lower monthly payments than Hire Purchase (for a comparable car and term)
- A low deposit at the beginning of the term.
- At the end of the agreement term, you have flexibility to decide what to do with the car.
- You will have a fixed monthly payment schedule which can help when budgeting.
Things to remember
- It is best to be realistic about annual mileage as there will be a charge for each additional mile covered.
- When the car is returned it has to be in good condition. Any damage is normally charged to you.
Alternative finance options
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