What is Personal Contract Purchase?
Personal Contract Purchase (pcp) is a finance product in which you make monthly payments towards the value of your car. At the end of the contract you can decide whether you would like to make a larger final payment and keep the car, not make the payment and hand the keys back (subject to mileage and conditions), or part exchange the car using any equity towards the deposit on your next car.
How does pcp work?
At the beginning of a pcp contract
Once you have found your perfect car and decided that you would like to fund that car using pcp you will need to decide on the terms of your contract, this will include;
- Mileage - how many miles per year are you likely to travel?
- Length of contract - how long would you like to spread your payments over? This figure is normally measured in months which usual contracts ranging from 24-60 months.
- Initial payment - How much deposit would you like to pay at the beginning of your contract?
This information will be presented to the finance company who will be funding your vehicle, along with the details required for a credit check to be made so you can apply for credit. Whomever you are buying your car from will ask for all the documentation needed and organise this application for you. If your finance application is successful, the finance company will pay for the car on your behalf and you can start driving it.
Monthly payments in a pcp contract
To decide upon the value of your monthly payments the finance company will consider how much the car will be worth at the end of your contract. To do this they consider many factors including the mileage figures and contract length you have specified. The finance company will then create a Guaranteed Future Value, this is often referred to as a 'balloon payment' and reflects the value of the vehicle at the end of your contract.
The total of the GFV is deferred until the end of your contact, so you will not be paying this value back during your monthly payments.
At the end of a pcp contract
At the end of the contract length the GFV figure is outstanding. At this point you have 2 options;
- You can choose to pay this amount and own the car. This means your car payments will end and you are free to do as you wish. If you decide to sell the car and it raises more than the GFV you can keep the profit.
- You may decide that you would not like to own the car in which case you do not need to make the balloon payment, you simply hand the keys back. There are several reasons you may decide to do this; you may want to drive a newer car and so begin a new finance agreement, you may find the car has devalued more quickly than initially thought and so do not wish to take this depreciation risk, or your vehicle needs may have changed.
- You can part exchange your car at the end of the contract and if the value is greater than the balloon payment, you can use this equity towards the deposit on your next car.
Whatever the reason behind making the final payment and keeping the car, or handing the keys back, the decision is yours to make.
The benefits of a pcp contact
There is an enormous amount of flexibility involved in a pcp contract. As the customer you can choose how long you would like your contract to last for, the amount of initial payment you would like to make and how many miles you will travel over the course of the contract, you can tailor the contract terms to your individual needs.
There is also flexibility at the end of the contract. You can choose whether you would like to pay the total of the GFV, part exchange and use the equity towards the deposit on your next car, or just hand the keys back.
Affordability and budgeting
A pcp can be organised to make a low initial payment, meaning you do not need a large amount of saving to get behind the wheel of a new car.
The monthly payments you are then required to make are fixed allowing for easier budgeting.
In many cases, you can also arrange to have servicing and maintenance costs built into your monthly payments. This reduces the chance of any unexpected motoring costs by spreading maintenance costs evenly over the length of your contract.
As the GFV is deferred until the end of the contact, monthly payments are typically lower than if you had entered into a Hire Purchase agreement without a balloon payment.
There is no risk of negative equity for you. The GFV is fixed at the beginning of the contract. This means if the value of your car is lower than expected at the end of your contract, you can hand the keys back to the finance company and any loss made is theirs (subject to condition and mileage).
Pros and Cons of Personal Contract Purchase at a Glance
Benefits of Personal Contract Purchase
- Paying a fixed monthly price allows for easier budgeting
- You may be able include maintenance costs
- Small initial payment
- Tailor the contract length and mileage covered to your needs
- No risk of negative equity
- Can choose whether to own your vehicle or not at the end of the contract
Personal Contract Purchase Considerations
- You will be charged for any excess mileage driven
- Charges will apply for any damage outside of fair wear and tear guidelines
- Road tax is not included
- You will need comprehensive insurance
- You will not own your vehicle until the final payment is made
Points to consider in a pcp contract
Fair wear and tear guidelines
If you enter into a PCP finance agreement the value of the car will also depend upon its general condition at the end of the contract. To provide an objective way of assessing a vehicles condition the Fair Wear and Tear Guidelines are used. These guidelines are created by the BVLRA, who are the trade body for the motor industry. No vehicle is going to be in perfect condition after being driven for several years so these guidelines allow for a certain number of stone chips and scratches. If any damage on your vehicle falls outside of these guidelines you will need to pay for repairs.
Excess mileage charges
At the beginning of your pcp you will have decided how many miles you will travel during the contract. This figure is used to calculate the GFV of your car and so if you travel over this agreed mileage you will be charged for all the excess miles covered. The amount charged varies depending on the finance company used and the type of car. You can ask what the excess mileage charge would be for your car at the beginning of the contract.
With a pcp you will not be the legal owner of your vehicle unless you make all the payments including the guaranteed future value. Until this point the finance company is the legal owner.
Additional costs in a pcp
Road tax is not commonly included in a pcp contact. You will need to pay separately for this. You will also need to make sure you have fully comprehensive insurance. You may also wish to consider taking out a GAP insurance policy to protect yourself in the event of a total loss.
Can you cancel a pcp contract?
You can ask for a settlement figure at any point in your contract to find out how much it would cost you if you needed to end your agreement.
Can you get a pcp on a used car?
Yes, you can. Many drivers choose this option as the bulk of a cars depreciation happens within the first few years. This means a pcp on a used car may be much more affordable.
Our sister site Rivervale Approved Used Vehicles has a range of pre-owned vehicles with finance examples displayed, so provides a good way to compare the cost of a new vehicle against the cost of a used vehicle.
If you have any queries about funding options available to you our Account Managers are always happy to help, so please give us a call on 01273 433480.
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