Personal contract plans, or PCP’s, are a popular form of finance that are ideal if you change your car often. Read more about how they work in our blog and see if it’s right for you.
Whereas a hire purchase (HP) agreement typically features the same monthly payments from start to finish, personal contract plans tend to have a lower monthly payment than HP, even with a maximum term of 49 months, with a large balloon payment at the end of the agreement.
You have 3 options at the end:
- Hand the car back to the finance company
- Pay off the balloon payment
- Part exchange against a new car (the most popular option)
PCP’s are ideal if you change your car often and most people choose a term that’s equal to how long they plan on keeping the car.
The balloon payment usually equates to the Guaranteed Minimum Future Value (GMFV), which is what the finance company predicts the car will be worth at the end of the agreement. This may be lower than what the car may actually be worth as it minimizes the finance company’s risk.
Providing you don’t go over your annual mileage, this will result in your car actually being worth more than GMFV, giving you equity (your car being worth more than your finance settlement), thus contributing towards a deposit on your next car.
It’s important to get your correct annual mileage, as going over will incur mileage charges if you hand the car back to the finance company. For example, a finance company may charge 8 pence for every mile you go. If you were to do 1,000 miles more than agreed, you would be charged £80.
You may be charged for any damage to your car as well and that goes for not having the car serviced in accordance to the manufacturer’s recommendations.
These are not so much an issue if you plan on part-exchanging your car against a new one, but they still may have an impact on the value of your car, leading to less equity to put towards a new one. Of course, these are no issue at all if you choose to buy the car outright and keep it.
- Don’t put in too large a deposit; this has no effect on GMFV, only monthly payments. Also you may not have the funds to put in a similar deposit on your next car at the end of the agreement, which may result in you having to settle for a lesser car.
- Enticing offers on brand new cars, with low monthly payments, may require larger deposit, usually thousands of pounds.
- Buying used, or nearly new, may save you that large deposit!
There has been some controversy surrounding PCP, with many dealerships not giving customers the full facts in how the agreement works, even going as far as not providing a hire purchase quote for comparison.
Car buyers were enticed with low monthly payments, with quotes based on annual mileage much lower than the customer actually does, and balloon payments and excess mileage charges were not explained. This resulted in people facing unexpected bills at the end of the agreement if they hand the car back to the finance company, or end up in negative equity when part-exchanging.
When it comes to finance, we put you in the driver’s seat. Our online finance calculator lets you do the math, allowing you to tweak the figures based on your budget and annual mileage. We display HP and PCP quotes side by side, so you can decide which is right for you, both online and in the showroom.
Our advisors won’t push you into taking a PCP. They are trained to only explain how each one works so you can make an informed decision. Remember: we don’t sell cars, we simply help you buy one.
Need more information? Give us a call on 0333 222 6599, or get more information on car finance by clicking here: Car Finance made simple by The Car People