PERSONAL CONTRACT PURCHASE - PCP

A PCP is a popular financing method for private users.
Monthly payments are lower than with Hire Purchase or Personal Loan, and the GFV offers protection from excessive depreciation.

The benefits of PCP


The main benefit for most people is that the monthly repayments and term of the agreement are lower than conventional Hire Purchase or a Personal Loan. PCP is also promoted as a means of protecting you against vehicle depreciation, but in reality the extra protection is unlikely to be called upon.

How a PCP works

You pay an initial deposit – typically the equivalent of three months payments. Then you make fixed monthly payments. The payments are invariably lower than those of a hire purchase scheme.
Then, at the end of the contract, you have four options:

  • Simply return the car to the finance company. If you haven’t exceeded the agreed mileage and the car is in acceptable condition, you can just return the car and that’s the end of it.
  • If you want to keep the car – all you have to do is to pay off or refinance the final Balloon payment. The Balloon is a lump sum that’s been deferred in order to reduce your payments (also known as GFV – explained below).
  • Trade it in for another car. If the trade-in price is higher than the Balloon payment, you can use the difference as a deposit towards your new car.
  • Prior to the end of the agreement, apply to the lender to let you sell the car privately. Anything you get over and above the Balloon is yours to keep.


Why the monthly payments are lower?

The monthly repayments are lower because of the Guaranteed Future Value (GFV). As part of the process of calculating the repayments, the lender estimates what they think the car might be worth at the end of the contract. Then, using that information, the lender sets a minimum figure at which they guarantee the car will be worth. That’s called the ‘guaranteed future value’ (GFV).
 The GFV, along with any deposit you pay, will be deducted from the price of the vehicle and your monthly payments are then calculated on the balance, plus interest on the balance and interest only on the GFV.
 So your monthly payments are lower because you’re not repaying the GFV during the agreement. What happens with the GFV is explained above in the ‘How a PCP works’ section above.

How can I get the payments even lower?
There are a number of ways to lower the monthly payment. You can put more deposit down, or extend the contract period. But one important way is to ensure the contract mileage is correct. In other words, that the number of miles on which the contract is based is the same as the amount of mileage you intend to cover. The GFV is based on the anticipated mileage. If you base the contract on less mileage, the GFV will be higher which means your monthly payments will be lower.


Exceeding the contract mileage
If you do more mileage than was agreed, you’ll be asked to pay an excess mileage charge if you end up handing the car back. This doesn’t apply if you keep the car (see ‘How a PCP works’ above). The mileage excess rate is a fixed number of pence per mile set at the beginning of the agreement.

Suitability


A PCP may suit someone who prefers lower monthly payments during the period of the agreement, and is happy to address the GFV at the end of the agreement. A PCP is also often promoted as a good method for drivers who have opted out of a company car scheme. The thinking is that if your company car allowance or your mileage reclaim can fund the monthly PCP payments (along with road fund, maintenance, fuel and any other direct expenses), you’re no worse off and can avoid paying high company car taxes.


Responsibility for the maintenance and general condition

Maintenance can be included in the contract, at extra cost.
It is in the user’s interest to maintain the general condition of the car. If you do, and you end up keeping the car or trading it in, you should get a better price. If you hand the car back to the finance company and the condition is below a ‘normal wear and tear’ standard, you could be faced with a bill. In simple terms ‘normal wear and tear means a condition in keeping with the age and mileage of the car – a car that is in fair working order, repair and condition. This will be detailed more specifically in the agreement itself but is not designed to catch you out. Obviously, if the Lender guarantees a price for the future, it’s only fair that the price is based on the vehicle being in reasonable condition.


Ownership at the end of the contract

Who owns the vehicle at the end of the contract? The answer is you if you want to or the finance company if that suits you better. It’s your choice – whichever is more beneficial to you.


Selling the car during the contract

As with Hire Purchase, you can request a ‘settlement figure’ – the amount of money required to settle the agreement. You can use part of or the entire sale proceeds to pay off the settlement figure. (If you do sell the car, you are legally obliged to settle the finance.) If your settlement figure is higher than the amount you intend to sell the vehicle for, you will have to make up the difference. (This situation may be forced upon you if the car is written off. You can protect yourself from this possibility by taking out GAP insurance.) Overall, is it more or less expensive than conventional HP?
 You can compare the overall costs and judge for yourself. You may find the overall cost to be similar.