Personal Contract Purchase (PCP) is similar to a Hire Purchase agreement as you will usually pay an initial deposit, followed by monthly instalments.
What makes PCP different is that your monthly instalments are paying off the depreciation of the vehicle, and not its entire value, over the course of the term. Then, when you get to the end of your agreement, there is a final ‘balloon payment’ that must be made if you want to keep the vehicle.
HOW DOES PCP ACTUALLY WORK?
At the start of your PCP contract, a Guaranteed Future Value (GFV) of the vehicle is set. This is the vehicle’s expected value when your contract ends.
For you, this means that the money you’re repaying is the difference between what the vehicle is worth now and what it will be worth at the end of your contract (the depreciation) plus interest, which is calculated on the full value of the vehicle. You’ll pay this difference off in monthly instalments.
Remember: you’re still liable for the full amount of the vehicle if anything happens to the vehicle or if you settle early. This means lower monthly payments for you, but you will need to pay a final payment at the end (the Guaranteed Future Value) if you want to keep the vehicle.
Once your agreement is finished, you’ll have three options:
Benefits
- Monthly payments on a vehicle financed by PCP are usually lower than if your vehicle is financed by a Hire Purchase agreement.
- If you decide not to buy the vehicle, you can simply walk away when you’ve made all the payments.
- Similar to PCH, you can drive away a new or used vehicle every few years (dependent on the chosen term) without worrying about selling it on.
- If your vehicle is worth more than the Guaranteed Future Value then you can use that equity towards a deposit on a new vehicle.
Things To Bear In Mind
- If you want to buy the vehicle you will need to pay your final balloon payment (the Guaranteed Future Value).
- Similar to PCH, you will need to agree on a mileage allowance at the beginning of your contract and there may be excess mileage charges if you exceed this.
- You won’t be able to sell the vehicle without settling the finance.
- You won’t own the vehicle until you have made all of your repayments.
- You’ll need to keep the vehicle properly insured, maintained and in your possession until the full value is paid off.
CAN I END MY PCP EARLY?
You can normally settle your deal early, however the finance company will require you to pay off the difference between what your vehicle is worth now, and what you still owe (negative equity).
On the other hand, you may find that at the end of your term your vehicle is worth more than the Guaranteed Future Value, which means you’ll have some positive equity to contribute towards your next vehicle.
Ultimately, the choice is yours and we always recommend you seek professional advice before making any final decisions. If you need further information or require comparative quotes on the finance options listed, don’t hesitate to call us on 01329 756 373 or Enquire Here
