Personal Contract Purchase Explained
Buying a car on PCP finance is a flexible option that’s become very popular. Here’s how PCPs work…
For: Flexible terms, low monthly payments.
Against: Hire purchase will be cheaper if you want to own the car at the end, financial penalties for excess mileage.
Consumer credit is booming in the UK, and the car industry plays a big part in fueling the demand thanks to the easy availability of PCPs – or Personal Contract Purchase schemes.
If you want to own the car at the end of your PCP agreement, you’ll need to find a chunky final payment – known as the final balloon payment – to make it yours. That’s why most people who want to own a car long-term don’t use PCPs.
Where a PCP can make a lot of sense, is if you want to change your car every three years or so. That’s because the canny PCP provider will do all they can to ensure that at the end of a contract your car’s actual value is a little higher than the final balloon payment required to buy it outright.
Typically, therefore, you’ll find yourself sitting on a little pot of ‘theoretical’ money your dealer will happily allocate to the deposit on your next PCP contract.
Guaranteed Minimum Future Value
When you set up a PCP deal, the dealer will give you a 'Guaranteed Minimum Future Value' for the car. The GMFV is the minimum amount the car will be worth at the end of the agreement. It means that if the car unexpectedly drops in value you'll be protected, and if the car happens to be worth more, you can use the equity as a deposit in your next PCP deal.
Manufacturers push PCP, so interest rates are often low, but they also set mileage limits with an excess mileage charge applied if you exceed them, usually at a pence-per-mile rate. What's more, you'll need to maintain the car in accordance with the manufacturer’s service schedule. While that's good practice anyway, if the car is damaged and you return it at the end of the PCP deal, the dealer can mark down its value.
If you want to take ownership of the car at the end of the term, PCP will often prove more expensive than hire purchase finance deals, but if you want to hand the car back or trade in for an all new model, as most PCP customers do, it's a good option.
PCP agreements start at less than £60 a month for some used city cars, depending on your credit history. A two-year-old family crossover such as the Nissan Qashqai can be yours for just over £150 a month on PCP, while monthly payments on a brand new Qashqai typically cost around £260.