PCP Finance – What Is It and How Does It Work?
PCP finance or personal contract purchase is an option to finance the purchase of your car, other than a straight out loan or HP (hire purchase). They are growing in popularity as they are flexible with £3.6 billion being spent on PCP finance deals in March of this year alone.
Whereas a loan is based on repaying the whole cost of the car you are buying over a given time, with interest of course, PCPs work slightly differently and are aimed at giving lower monthly repayments. But the important thing worth noting is that you are effectively loaning a car for the length of the agreement rather than buying it, although you do have the option to buy the car if you choose to (about 20% of customers take this route.)
There are three parts to PCP finance:
- An initial deposit – typically about 10% of the car’s value.
- Monthly repayments usually over about a 3 year period.
- What is called a ‘balloon payment’ at the end of the deal to pay off the balance of the car.
The idea of a PCP loan is to make it easy for you to update your car regularly. If you plan to keep the car for a long time, this may not be the best way to go and you should think about hire purchase or a car loan. Instead of focussing on repaying the full value of the car, the monthly repayments are actually to cover what the car manufacturer and finance company believe is how much the car will depreciate in value over the term of the agreement. Which is why the instalments can be lower than a traditional repayment loan. The loan still includes interest and this can vary from dealer to dealer. You can find different deals around – with some dealers offering a contribution to the deposit or 0% finance. It’s worth shopping around and looking out for the car ads.
What Happens At The End of The Agreement?
When the finance deal comes to end, you have three options:
- You can hand the car back in and walk away – although you may have costs to consider – please see below.
- Pay the final balloon payment and the car is yours to keep.
- Use the car as a deposit on a new car, with the option to take out a new PCP deal. Dealers usually plan for the balloon payment to be less than the projected car’s value at the end of the term, leaving you money over to use as a deposit.
Costs to Be Aware Of
When you sign your PCP agreement, you will agree with the dealer an annual mileage that you think you will cover during the loan period. If you then end up going over this annual mileage be aware that the dealer will charge you for this. You will need to check your agreement for the mileage cost for this can vary by dealer, but the average is about 10p per mile, for every mile you go over.
For example, if you agree to 10,000 miles per year for three years and actually end up doing 12,000 miles per year. The cost over three years will work out as £600. So this is something you should think carefully about before you commit to an agreement.
Damage to the Car
When you return your car at the end of the agreement, it needs to be in good condition if you wish to hand it back or trade it in for a newer model. Dealers allow for wear and tear, but damage to both the exterior and interior can lead them to lower the price of the trade-in value. You will also need the car to have a full dealer service history over this time. Don’t forget you want this value to be at least equal to if not exceeding the balloon payment.
Be aware of what your termination options are. Circumstances can change and you may find you can no longer afford payments or the car is no longer suitable for your needs. Again, check your agreement as some dealers only offer you this half way through the contract. There is a good chance there will be a cost associated with this too, as you may have to pay any difference between what you owe on your loan and how much the car is currently worth.
Is It For Me?
If you like to change your car regularly, then PCP may very well the right choice for you. You need to consider the cost of finance and mileage. But it can give you a lower cost option to owning a nice shiny new car. However, if you plan to buy your car outright, PCP can end up more expensive than hire purchase, so you should look at your finance options carefully. In any case, always take careful financial advice from a qualified expert – new car franchise dealerships will have an expert or you can take a look at the Government backed Money Advice Service website for independent financial advice.