Personal Contract Purchase (PCP) determines the value of the car at the beginning of the agreement and this value is deferred until the end of the agreement. Referred to as the Guaranteed Minimum Future Value (GMFV) it is estimated using a range of factors, including the age of the car at the end of the agreement and how many miles it is estimated to cover during that agreement lifespan.
What's important to take into account is that the future value of the car is guaranteed by the lender so will not be subject to change. The advantage is that by deferring the GMFV to the end of the agreement means the payments made every month will be smaller than those on a similar HP agreement. This is a great way to help with budgeting and planning. A PCP offers tremendous versatility.
At the end of the period the car can be owned outright - achieved by paying the deferred value (GMFV) - or simply returned and a new make and model chosen if preferred.
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Personal Contract Purchase
At the Start of the Agreement
- The amount you want to borrow is agreed upfront. This is less any deposit and will also exclude the value of any car you are part-exchanging
- The finance application is sent to the selected motor finance company and, when credit checks are complete, the lender will pay for the car on your behalf.
- During the period of the agreement, monthly payments will cover the full price of the car plus interest, minus the guaranteed future value of the car.
At the End of the Agreement
- Paying the guaranteed future value in full will ensure the car is owned outright.
- Alternatively simply return the car with no further obligation
- Use the car as a trade in by using any existing equity (if of course, the guaranteed future value is lower than the current market value of the car) as a deposit for a new finance agreement. You may choose a completely new brand of car at this stage
- If the forecast mileage (agreed at the start of the contract) has been exceeded an excess charge will be applied (you wish to hand back the car).
- Should you choose a full or partial settlement of the PCP agreement is possible. However the details should be verified with your lender as every finance company will operate using different procedures.
Benefits of Personal Contract Purchase
- Payments made very month are lower than under a Hire Purchase agreement (for a comparable car and term)
- At the beginning of the term a low deposit made be made.
- The agreement is subject to regulation meaning legal obligations are in place to protect your rights (assuming you don't opt out of the agreement)
- At the end of the agreement term, you have flexibility to decide what to do with the car.
- There is a fixed monthly payment plan – perfect for those looking to budget and plan.
Things to remember
- Be honest with yourself about annual mileage. For each additional mile covered there will be a charge.
- The car should be returned in good condition. Any damage is your responsibility and normally charged to you.
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