Personal Contract Purchase
What is Personal Contract Purchase?
Personal Contract Purchase (PCP) is a way to finance a car by paying monthly instalments. It’s a form of Hire Purchase, but it works a bit differently and can offer more flexibility.
With a Personal Contract Purchase agreement, your monthly payments are based on the difference between what the car is worth now, and the amount it’s expected to be worth at the end of the agreement, after depreciation (known as the Guaranteed Minimum Future Value, or GMFV).
At the beginning of the agreement, you’ll pay a deposit which can be as low as the first payment, and the GMFV will be set. Together with interest, this determines how much you pay per month. A mileage limit for the lifetime of the deal will be agreed on too.
You’re then free to use the car – although you won’t actually own it until the deal ends and you decide to keep it.
On top of that PCP is much more flexible. At the end of your agreement you have three options regarding the settlement of your agreement. For more information read on.
PCP works best if you only pay a small deposit, ideally no more than 10% of the price of your car.
Use the value in your car
By using the future value of your car as an asset, PCP enables you to have a lower monthly payment than hire purchase.
What are my options at the end of the agreement?
When the deal ends, you have three options:
Pay the final value of the car (known as a balloon payment) and keep it
Part exchange it for a new car
Hand back the car
The balloon payment is equal to the GMFV. Pay it and you own the car – simple as that.
PCP agreements are ideal as long as you know roughly how much mileage you’re going to drive the car for during the period of the loan. Like Hire Purchase, you do not own the car financed by a PCP agreement until all the payments and fees have been paid. You will need to take care of the car, maintain it within the manufacturer’s guidelines and, if you choose to return it at the end of the agreement, ensure that you have done no more than the contracted mileage, otherwise excess mileage charges will apply.
As with any other finance agreement, Personal Contract Purchase is only available to people over 18 years of age and is subject to status.
The part exchange option needs a bit more explanation. At the end of a PCP deal, the car is often worth a bit more than the balloon payment. Instead of buying the car, you can put this equity towards a deposit to roll into a new PCP agreement, with a new car.
Finally, you can simply hand the car back and continue on your way. As long as you’re within the agreed mileage limit and there’s no damage to the car, you’ll have no extra fees to pay.
How does PCP work compared to other forms of car finance?
This table shows the differences between Personal Contract Purchase, Hire Purchase and Personal Contract Hire:
|Personal Contract Hire (PCH, aka leasing)||Personal Contract Purchase (PCP)||Hire Purchase (HP)||Explanation|
|I want to drive a recent car without paying the up-front costs||✔||✔||✔||One benefit of all three is that you can drive a recent car, or even a brand new one, without the steep up-front costs associated with buying outright.|
|I want the option of maintenance costs built into the contract||✔||✔||✔||You can take a service plan to include maintenance with any product.|
|I might want to buy the car at the end of the deal||✘||✔||✔||When you lease, there's normally no option to buy the car at the end of the deal.|
|I want to drive as many miles as I want without penalty||✘||✘||✔||You don't need to worry about mileage on a HP deal. PCP often offers less restrictive mileage terms than leasing.|
|I might want to switch to a different car at the end of the deal||✔||✔||✔||
Under PCP, you usually have equity that you can put toward a new deal with a new car when your existing deal ends.
While most people choose to buy the car at the end of a Hire Purchase deal, you’re not obliged to.
|I want to make monthly payments||✔||✔||✔||
Generally, leasing offers the lowest monthly payments and HP the highest, with PCP in between. However, this might vary according to the car, the lender and the deal you get.
Is PCP the right type of car finance for me?
PCP deals are great for people who like to keep their options open, while enjoying low monthly payments.
The flexibility to keep, switch or walk away at the end means it’s ideal if you’re not sure what life’s going to look like in a few years, if you’re prone to changing your mind, or if you like switching cars regularly. And because you’re only paying for a smaller part of the loan plus interest, your monthly payments will be lower than a hire purchase agreement.
However, if you do want to buy the car, you’ll need to ensure you’ve saved enough to make the balloon payment when the contract ends. It’s also important to stick within the agreed mileage limit and take good care of the car to avoid incurring penalties.
Finally, make sure you are happy with the length of time the loan is over. It’s more difficult to change earlier than the agreement end date due to the interest and final balloon payment.
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What happens at the end of a PCP agreement?
When a PCP agreement ends, you have three options:
- Buy the car by making the balloon payment
- Part exchange it for a new car
- Hand back the car and finish the agreement
Is PCP leasing?
PCP isn’t considered leasing, as you’re not simply hiring the car – you’re paying into an agreement that includes the option to purchase it. Unlike a leasing deal, you may have some equity in the car when the deal ends.
Can I cancel a PCP agreement?
You can hand the car back after you’ve made 50% of the total amount payable, with no further obligation as long as there is no damage to the car. This is called Voluntary Termination.