What is Personal Contract Purchase?
- What is Personal Contract Purchase?
- How does Personal Contract Purchase work?
- What happens at the end of my PCP agreement?
- What are the benefits of Personal Contract Purchase?
- What are the disadvantages of Personal Contract Purchase?
What is Personal Contract Purchase?
Personal Contract Purchase, or PCP, is a type of vehicle finance for individual purchasers. It’s similar to traditional hire purchase (buying in instalments).
However, unlike the more traditional hire purchase where you pay the total debt in equal monthly instalments across the full term of the agreement. PCP has been designed so that you pay a low monthly amount over the contract period (normally between 2 and 4 years), with a final balloon payment left to be paid at the end of the agreement.
Ultimately, if you’re looking to make lower monthly payments and would like to change your car regularly, then a Personal Contract Purchase could be just what you’re looking for.
How does Personal Contract Purchase work?
The first step is to choose the right vehicle for you; new or used. Then you need to make three decisions that will have an effect on your monthly repayments:
This is how much money you want to pay upfront. You can potentially use a part-exchange, or a combination of part-exchange and deposit, as long as the combined value is generally no more than 30% of the overall vehicle cost
- Repayment period
This is the length of the contract, which can be anywhere between 18 to 48 months on all new vehicles. This will vary when it comes to used vehicles and will be based on the age and mileage of the used car.
- Annual mileage
It’s important to be as accurate as you can be with this, as it can’t be changed during the agreement.
Once you have decided on these, your monthly payments can be calculated, and a Guaranteed Minimum Future Value (GMFV) will be generated. The GMFV is fixed.
During your agreement, you have the option to settle the finance at any time. You can do this by repaying the outstanding balance, including the GMFV, this is the settlement figure.
If you are thinking about replacing your vehicle at the end of your agreement, then the ideal time to start thinking about this is about 3 – 4 months before you are due to make your last repayment. This will give you enough time to research the vehicles you’re considering and give them a test drive.
What are the options at the end of my Personal Contract Purchase agreement?
When you have a PCP you have three options at the end of your contract:
- Part-exchange it
If you decide that you want to replace your vehicle at the end of your agreement you can part-exchange the vehicle. The equity left in the vehicle will be used to clear your balloon payment and any equity left can be used as a deposit towards your next vehicle.
- Buy it
If you love your vehicle and don’t want to part exchange it for another, you can pay off the GMFV amount plus the ‘option to purchase’ fee to own it. This can be done using your hard-earned savings, or you can get a Hire Purchase (HP) finance agreement with affordable payments (at a fixed rate) to help spread the cost out over a set term.
- Return it
If you’ve decided that you don’t wish to own your vehicle and you also don’t want to part-exchange it for another, you can hand it back. Provided the vehicle is in good condition and repair and you have no excess mileage (above what was agreed at the start of your agreement) you can return it with nothing left to owe.
If you have gone over your agreed mileage and the vehicle has a bit of damage you will still be able to hand it back. However, the Finance Company will work out what you need to pay in order to bring the vehicle up to the required standard as well as work out the mileage charge based on the pence-per-mile charge on your contract.
What are the benefits of Personal Contract Purchase?
There are a number of benefits to choosing Personal Contract Purchase (PCP). These include:
- You can never go into negative equity
- There is a fixed interest rate for the term
- As you defer a balance to the end of the agreement (GMFV), you will have lower monthly payments in comparison with a personal loan or HP equivalent
- You can potentially afford a newer or higher specification vehicle than you expected
- You can pay the agreement off at any point by paying the settlement figure. This means that you will own the vehicle sooner and pay less interest
- You can change your vehicle sooner than the agreed contract term, subject to the value of the vehicle and your own budgeting.
What are the disadvantages of Personal Contract Purchase?
As with any financial agreement, there are advantages and disadvantages. With a PCP there are some disadvantages, but they are outweighed by the benefits. The disadvantages are:
- The vehicle is not yours until you make your last payment and pay the option to purchase fee
- There is interest applied to the agreement
- You are expected to keep the vehicle in good condition and repair for the duration of the agreement
- Your mileage is set
- The vehicle must reside in the UK.
If you’re looking for a new vehicle and would like to find out more about how Personal Contract Purchase could benefit you, start your journey with OSV by requesting a call back using the form below.