If you’re considering buying a new car it isn't just the cost of the car you need to think about, you also need to consider the cost of insurance, car tax, and how you are going to buy the car, so it's possible that you’re exploring some of the different options available to you when it comes to financing. Whether you’re looking to buy the vehicle outright, or would prefer some form of loan or finance agreement, it’s worth knowing what options you have before making such a large purchase. In this guide, we’ll be taking a look at an increasingly popular kind of car finance loan, referred to as a Personal Contract Purchase (PCP).
A Personal Contract Purchase allows you to take a partial loan to purchase a car with. This kind of loan is unique as you only borrow an amount that is equal to the estimated depreciation of the car’s value.
PCP plans generally last for 18-48 months and offer a few different options to the buyer when they reach the end of their term, such as:
In most cases, PCP providers will insist the buyer puts down a deposit on the vehicle – often around 10% of the car’s purchase price (some PCPs do offer no-deposit agreements, but these are rare).
It’s also important to understand the Guaranteed Minimum Future Value (often referred to as ‘GMFV’ or ‘balloon payment’).
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; from your estimated annual mileage, make and model of the car and the length of your agreement.
When the end of your PCP term comes, the company cannot ask you for any more money than the GMFV, meaning if the car is worth less than predicted, the finance company must cover the loss. This is also the case if you decide to return the car at the end of the agreement.
Many people like the freedom that PCPs offer, and often renew their agreements at the end of each term by returning the previous car and acquiring a new one as part of a new agreement.
Buyers can switch between dealers and manufacturers when changing PCP agreements, and if the previous vehicle is worth more than the GMFV figure, you can use the leftover money to put towards a deposit on the next vehicle.
However, if the car was worth less than the GMFV, you would have to cover the deposit on the next PCP car yourself.
On the odd occasion, PCP firms offer customers to sell the previous car privately and keep any money over the GMFV. Be sure to check this with your finance company before attempting it, as it is not always possible under the terms of the contract.
It’s not uncommon for PCP agreements to come with mileage limitations and penalties for customers who exceed the limits put in place.
For example, some Volkswagen PCP deals charge an extra 6p per mile, so if a customer were to run over the agreed maximum mileage by 5,000 miles, they would have to pay an additional £300 fee.
Many firms also have terms relating to the condition the car is kept in, insisting on regular serving and inspections at the dealership.
You can also be charged if you don’t keep the car in good condition. Some firms even insist on a regular service, often at the dealership.
When it comes down to it, the most attractive aspect of a PCP is the monthly cost to the customer. Because you aren’t borrowing the full value of the car, the monthly payments compared to a traditional loan on the full-purchase of a car are significantly lower. This often allows customers to afford larger or more luxurious vehicles than they would otherwise be able to afford, which is ideal for those who like to change their car's often.
Also, if you’re the sort of person who likes to regularly change and update their cars, the flexibility of part-exchanging PCPs may also be of interest.
However, that’s not to say PCPs don’t have their disadvantages. Customers who wish to keep the car at the end of their PCP will have to pay the final ‘balloon payment’ at the end of the term, and the many conditions such as mileage limitations that customers are obliged to abide by can sometimes be quite restrictive.
That’s not to say that if you intend to keep the car at the end of the agreement, a PCP is not for you; you can still score a great deal on a new car though PCP, but it’s worth comparing the cost with offers from other financing options such as personal loans, and hire purchase.