Personal Contract Purchase (PCP) is one of the UK’s best known and most frequently chosen types of car finance. It now accounts for a staggering 80% of all new and used car finance agreements and is the most widely promoted by car manufacturers, dealers and online brokers.
However, despite its popularity, many would argue that the PCP remains one of the most misunderstood personal finance products. That said, it’s actually fairly easy to understand what a PCP is when you break it down into the following three bite-size chunks.
Tip: If you don’t have a PCP credit score due to adverse credit history you could check out a bad credit car finance provider such as Carvine.
1. The Deposit
With a PCP there’s usually a customer deposit that equates to 10 per cent of the car’s sale price and is payable upon commencement of the agreement. However, this can differ in some circumstances. Most notably in the case of manufacturer’s headline deals on new cars, which are sometimes made available with no or very little deposit.
In addition to the customer deposit, some manufacturers also incorporate a deposit contribution. This is an amount that is paid by the manufacturer and not the customer. It’s essentially a way for the manufacturer to make the car cheaper and ultimately more desirable without lowering the list price of the car.
However, it’s important to note that any quote that includes a manufacturer’s deposit contribution will be subject to you taking car finance from it’s own finance house i.e. Ford Credit or Vauxhall Financial Services.
2. The Payments
Before calculating the monthly payments for a PCP on a particular car, the finance company will require you to specify a fixed annual mileage.
This usually runs in increments of 1,000 and ranges from 5,000 upwards.
Once confirmed, the finance company will use historical pricing data to estimate how much the car will be worth at the end of the finance agreement, in the trade and on the paperwork it will be referred to as the Guaranteed Future Value (GFV) or the ‘balloon’ payment.
Once calculated, both the GFV figure and the deposit are deducted from the price of the car and what remains is known as the amount to finance. This amount is then divided across a number of monthly payments. Most PCP agreements run over 48 months.
It’s important to note that the GFV will vary depending on the number of miles you specify and that the GFV directly effects the monthly payments. Essentially, you are paying for the use of the car and not to own it.
3. The End
One of the PCP’s biggest selling points is the flexibility it offers. This is most notable when you reach the end of your agreement, at which point you have three options to choose from.
Hand the keys back and walk away – Provided your car is in good condition with no damage and you haven’t exceeded your mileage allowance, you can simply hand the keys back to the dealer and walk away without paying a penny.
Part-ex for a new car – If you are looking to buy a new car, you can part-ex your existing car and use the value over and above the GFV figure as a deposit towards it. As an example, if your GFV is £5,000, but the dealer values the car at £6,500, you essentially have £1,500 as a deposit, which will therefore reduce the monthly payments on your new car.
Pay the GFV and own the car – Although all the signs suggest that car ownership is on the decline there are still many people who wish to own a car outright and by paying the GFV on a PCP, you can do just that.
Top tip: It’s important to consider things such as road tax and ULEZ when looking to buy a new car.
Interesting related article: “What is auto-financing?“