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PERSONAL CONTRACT PURCHASE

What is Personal Contract Purchase?

Personal Contract Purchase (PCP) is a finance agreement designed to give you the flexibility of driving a car through monthly car loan payments for a fixed period of time. Once your agreement ends, you have the option to exchange your current car for a new one, pay a lump sum (balloon payment) to keep your current car or simply end your agreement and walk away with no further obligation.

The way a PCP deal works is that you pay for the vehicle’s depreciation during the time you are in possession of the car rather than the whole value of the car. For example, if you were to take out a PCP finance deal on a car priced at £20,000 for a period of 24 months, your car dealer would calculate the Guaranteed Minimum Future Value (GMFV) of the car and calculate your monthly car loan payments. A GMFV is the value of your car after your contract term ends i.e. how much that car would depreciate after a period of 24 months.

To illustrate:

Car price Value of car after 24 months (GMFV) Your PCP credit Your monthly car loan payment
£20,000 £11,000 £20,000 - £11,000 = £9,000 £9,000/24 = £375 (plus any interest)

In short, under a Personal Contract Purchase plan (PCP) you choose your car, how much deposit to put down, the term of the contract and you also stipulate a maximum annual mileage limit.

Advantages of a PCP car finance deal

  • You are able to return the car at the end of your contractual agreement meaning you are not tied down to owning the car.
  • You can swap your car at the end of your agreement for a brand-new car so you can stay on trend with the latest car releases regularly.
  • You can pay the balloon payment at the end of your agreement if you wish which enables you to own the car outright.
  • Your monthly repayments are fixed to assist you with your cash-flow and budgeting.
  • The Guaranteed Minimum Finance Value of the vehicle covers you if the value of the car suddenly drops in the midst of your finance agreement.
  • Your deposit is likely to be less than other finance plans as you are only repaying the depreciation value rather than the whole sum of the car.

Disadvantages of a PCP car finance deal

  • You will be restricted to annual mileage limits and the cost of going over is charged per mile.
  • You will need to maintain the car in a perfect condition if you choose to return it at the end of your agreement and will be charged any costs of damage/ excessive wear and tear.
  • If you do happen to keep the car at the end of your PCP agreement, you will need to settle with a balloon payment at the end of your term which can be costly (in the example shown earlier, it would be an outright payment of £11,000).

Is a PCP car finance deal the best deal for me?

A PCP finance deal could be the best deal for you if:

  • You’re unsure of what you will do once your agreement term ends and would want some flexibility around the matter.
  • You don’t want to keep the car at the end of your agreement and would much prefer to swap it for a newer one.
  • You are happy to stick to an annual mileage cap.
  • You are after the lowest possible monthly payments but do not want to be tied down to a long-term contract.

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