What is a Personal Contract Purchase (PCP)

If you’re in the market for a new car, there are various ways of financing, renting or buying a vehicle. Whilst leasing is becoming extremely popular, another common way of purchasing a new car is through a PCP, otherwise known as Personal Contract Purchase.

But what is a PCP and how can it benefit you, when purchasing a new or nearly new car?

We’re going to look at the Personal Contract Purchase financing option and fill you in on the pro’s and the con’s:

• What is a PCP and how does it work?
• What are the advantages of a PCP?
• What are the disadvantages of a PCP?
• What happens at the end of a PCP?
• What is a GFV (Guaranteed Future Value)?
• What is a Balloon Payment at the end of a PCP?
• Can I finance a Balloon Payment?
• PCP Vs. HP

What is a PCP and how does it work?

A Personal Contract Purchase (PCP) is a flexible financing option when it comes to you buying your next new or nearly new car.

You start by choosing your vehicle, estimating your yearly mileage, paying an initial deposit and then make monthly payments over an agreed period, usually 24, 36 and 48 months.

The main point of a PCP is that you are paying monthly towards the cars depreciation.

Depreciation is the predicted value of the car at the end of the contracted period, this can also be called the residual value. Cars will generally lose approximately 60% of their value in the first 3 years after registration. Please see our article on Depreciation Explained by clicking on the highlighted link.

With a Personal Contract Purchase, you will be paying the gap between the purchase price and the residual value (depreciation value). Depending on the financing company this can also be called the Guaranteed Future Value (GFV).

Here is an example below of how a PCP is set up:

At the end of the PCP, you will have three options:

1. Hand it back to the finance company and walk away
2. You can trade it in and use any equity towards your next car
3. Pay off the balloon payment, as per the example you would pay £12,000 to keep the vehicle.

Depending on the car and its value, occasionally it can be be beneficial to trade your car in part way through an agreement, so long as the car has gained enough equity.

What are the advantages of a PCP?

• You can have a brand new car every 2/3/4 years
• It’s possible to get a better or higher specification vehicle as monthly payments can work out lower than if you were to buy the vehicle outright.
• Flexible options at the end of the agreed term.
• The Guaranteed Future Value is agreed at the beginning of a PCP and will never change, but this is set on your agreed mileage.
• If you take a 2 or a 3 year contract, you won’t have to worry about an MOT
• Most manufacturers cover their vehicles for at least 3 years, so if your contract is less, you won’t have any worries, should the new car get any faults.
• If the car is worth more than the GFV at the end of the agreed term, you will have a nice sum of money to put towards your next vehicle.

What are the disadvantages of a PCP?

• Although the vehicle’s log book will be in your name, you will not own the vehicle until the very last payment has been made. This includes the GFV.
• You will have to pay for road tax on your vehicle, unlike a PCH.
• You’ve got to adhere to the mileage parameters, if you go over the contracted mileage, you may have an excess mileage charge to pay.
• With most companies you will have to pass a credit check and your credit must be satisfactory to excellent.
• Adding options to a vehicle on PCP

What happens at the end of a PCP?

At the end of a Personal Contract Purchase, you will have 3 options:

1. To pay off the Guaranteed Future Value (GFV) and keep the car.
2. Hand the car back to the finance company and walk away
3. Swap your car for a new one and take out a new PCP

What is a GFV (Guaranteed Future Value)?

A guaranteed future value or a GFV, is what the finance company is estimating your car’s worth will be at the end of the contract.

They take into consideration historic data on that particular make/model and the mileage parameters that you have asked for at the beginning of the contract.

The car will never be worth less than the GFV, if it is, you simply hand the car back to the finance company, they close the account and you start again with a new PCP.

What is a Balloon Payment at the end of a PCP?

The Balloon Payment is pretty much the same as a GFV, however, be wary as some companies just offset an amount of money using a standard HP agreement and it does not guarantee the future value of the vehicle.

Can I finance a Balloon Payment?

Yes you can, you can finance a balloon payment or the Guaranteed Future Value payment. You can either complete our form and we can put you in touch with the right people or you could use a bank loan.

PCP Vs. HP

There are a few differences between a PCP and a HP agreement so first, lets look at the PCP:

• Ideal if you want lower monthly payments
• Great if you don’t know what to do at the end of the agreement as it gives you three options.
• Manufacturers and Funders are more likely to offer incentives for going with a PCP over a HP deal.

Lets now look at the HP differences:

• Ideal if you want to keep the car at the end of the agreed period
• You don’t mind the higher monthly payments
• HP is available sometimes with 0% finance

Adding options to a vehicle on PCP

Its not always a good idea to load your car up with options and specification if you are taking a car on a PCP. As the funders do not usually take the additional gadgets into account when they work out the GFV, therefore, if you did want to load your car, it may be beneficial to take it on a traditional Hire Purchase arrangement.

Need more information on a PCP?

If you would like more help and advice on PCP’s, then complete our online form and we will pass your information on to the most relevant broker who can explain what is the best solution for you.