If you’re considering buying a car, it isn’t just the vehicle you need to think about, you also need to consider things such as the cost of insurance, car tax, repair costs, and how you’re going to finance the car. When considering how to finance your purchase, you should understand your options before making such a large commitment. In this guide we will be considering financing a car through Personal Contract Purchase, which is often referred to as PCP.
A Personal Contract Purchase is a popular finance option for purchasing new and used cars. You are essentially renting a car for a period of time specified in your contract, and at the end of the agreement you have the choice of:
At the beginning of your application you will need to pass a credit check, which will consider your ability to meet the monthly payments. It is important to ensure you can comfortably afford these payments when taking out a PCP contract, as being unable to pay could result in rising debt, and your credit score being negatively affected.
In most cases, PCP providers will insist the buyer puts down a deposit on the vehicle, which is often a minimum of around 10% of the car’s purchase price. There are some PCP agreements that don’t require a deposit from the buyer, but these are rare.
You should also consider the overall cost of the agreement and not just the monthly payments. For example, a finance company could be offering you a deal at £200 per month for 48 months with a small deposit, but the balloon payment could be unaffordable, meaning you won’t be able to purchase the car. Some dealerships will offer 0% finance, but it is important to look at the entirety of the offer as the finance company may recoup lost money elsewhere through the balloon payment, increasing the list price, or not offering any discount.
There are no depreciation concerns as you can simply hand it back to the finance company at the end of the agreement
You can drive a car which may be otherwise unobtainable
Fixed monthly payments means it is easier to manage your finances and budget for other expenses
Dealerships may throw in additional extras such as maintenance packages, insurance, and warranties, which allows for easier budgeting month-to-month
The predicted minimum future value (PMFV) is likely to be set at an amount very close to the actual value of the car, so any positive equity you have in the car may be minimal
You will be limited to the number of miles you can do throughout the contract, and will be charged if you give the car back at the end of the agreement over the agreed figure. If you have a change in circumstances which require you to travel more, this could get expensive
There are additional charges if you hand the vehicle back at the end of the agreement and there is any damage above ‘general wear and tear’
The car must have fully comprehensive insurance cover for the duration of the contract, which limits your options compared with if you owned the vehicle
You don’t own the car until all payments have been made, and if you want to finish your agreement early you must pay an early settlement fee if the car is in negative equity
Unforeseen circumstances or poor financial planning could result in not being able to afford your monthly payments. If this is the case, you will need to consider your options to ensure you don’t seriously impact your credit rating or get into larger debt.
The first thing you should do is speak to the finance company to discuss your circumstances and any options they may provide.
They my offer the option for an early repayment, where you pay a settlement figure to the finance provider. This will result in you owning the car, which would allow you to keep or sell.
PCP isn’t the only option available when financing a car, and there are a number of other options which could be more suited to your requirements.
You will rent the car over specified period of time, which is usually 24, 36 or 48 months. Unlike PCP, you don’t have the option to purchase the car at the end of the contract and will need to hand the car back to the finance provider. The deposit and monthly costs are generally lower than the same car on PCP, and motorists have the option of adding a maintenance agreement that can cover costs for servicing, glass damage, new tyres and annual car tax. PCH is not suitable for those who want to own a car, want the flexibility of changing their car mid-way through the contract or drive long distances on a regular basis.
Similar to a personal loan, Hire Purchase (HP) requires you to make regular monthly payments and you own the car at the end of the agreed term, without a balloon payment. The main differences are that you don’t own the car until you have made all of the monthly repayments, and you will have to pay a deposit at the beginning of the term. On the other hand, you are more likely to be accepted for a HP agreement than a personal loan due to less risk for the finance company. Advantages include being able to return the vehicle after 50% of the payments have been made, and most dealerships will arrange the finance on your behalf.
A popular means of finance where you will have full ownership of a car. If you choose a personal loan you will also become a cash buyer, which may help you negotiate a better deal. To get a loan with a low APR and limit your repayments, you will need to have a good credit rating. Unlike PCP, you could be affected by depreciation, meaning that you owe more on the car than it’s worth. This isn’t the case with PCP as you don’t own the car until all repayments have been made.
Providing there is a sufficient balance limit, a credit card can be used to purchase a car. If you have a good credit rating and get accepted for a 0% credit card, you could essentially buy a car with no interest payments, providing you pay off the balance within the promotional period. If you choose to finance a car on a credit card, you will own the car outright and can always sell the vehicle to pay off the balance at any point, providing depreciation doesn’t exceed the outstanding balance. However, many dealerships won’t accept credit cards as a valid payment method. Credit cards are generally better suited to shorter term borrowing, and you’ll need to ensure you can pay off the balance relatively quickly to ensure you minimise the overall amount that needs to be paid back.
You will need to pass a credit check before being accepted for PCP to ensure you can afford the monthly repayments. This will appear on your credit check file.
You are more likely to be accepted for a PCP plan than a personal loan or credit card due to the finance being secured against the vehicle. Ensuring that you always pay the monthly repayments will help your credit score over the course of the agreement. However, if you fail to pay, you may be marked as default which could impact your ability to borrow in the future.
PCP is available on both new and used vehicles. Dealerships will offer different levels of APR which will consider the depreciation over the term of the contract and their profit margins. Some manufacturers and dealers will advertise 0% PCP deals, but it is important to be cautious of these as the losses in APR tend to be added elsewhere through the balloon payment at the end of the contract, or by the list price being inflated.
When a customer applies for a PCP, the company financing the deal will calculate a predicted ‘minimum value’ for the car at the end of the agreement.
For example, if you were to register for a PCP over 36 months to buy a car worth £24,000, the PCP provider would calculate that after three years the car would be worth at least £14,000 – that is the GMFV.
So, with this figure in mind, we can now determine that you would need to borrow the difference between the purchase price of the car, and the predicted value of the car: £24,000 - £14,000 = £10,000.
When it comes to working out the GMFV, the finance company take a wide number of factors into consideration; such as estimated annual mileage, make and model of the car, and the length of your agreement.
You can pay a larger deposit for the vehicle, or increase the duration of the PCP agreement to lower monthly repayments. Limiting the number of miles per year can also reduce the monthly payments, as you are reducing the depreciation of the car.
However, if you choose to extend the period of your term, the overall cost of the car may increase due to paying more interest. Ultimately, the best way to achieve lower monthly payments is to finance a car with a lower value.
All costs associated with a PCP agreement will be outlined in the contract. Other than the deposit and monthly repayments, there is an 'option to purchase fee' to transfer over the ownership of the vehicle if you choose to purchase. If you choose against purchasing the car, you may have to pay costs for excess mileage and any damage above 'general wear and tear'.