The personal contract purchase (PCP) is a popular type of car finance. It allows you to drive the car for a few years and then have the option to return it or buy it at the end.
Although PCP is a popular way to finance a car purchase, it can be more difficult to understand than other forms of car finance.
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Continue reading to learn more about PCP car financing and whether it is the right choice for you.
What is PCP car financing?
Personal contract purchase is also known as PCP. This type of car financing allows you to drive the car for a specified period of time without having to purchase it.
You are the registered keeper and pay monthly payments to the finance provider. The vehicle legally becomes yours for the agreed term.
The payment structure is the same as other forms of car financing, but there are key differences that make PCP stand out.
You have the option to either return the vehicle to the dealer or exchange it for a new car with finance agreement. Or you can pay a lump sum to keep the car.
The final lump sum, also called the balloon payment, is calculated using the Guaranteed Minimum Future Value or GMFV. This is discussed in the next section.
Car financing — PCP vs. HP
Personal Contract Purchase (HP) and Hire Purchase are similar in that you finance your car and then pay it back monthly with additional interest. These agreements are a type secured loan. The car is not yours until the end of the agreement. HP offers the option of paying a purchase fee to keep your car. However, this payment is typically similar to the monthly payments. The final payment for PCP or the ‘balloon payment” tends to be very high.
Monthly payments for hire-purchase tend to be more expensive than low-cost PCP car financing. HP car financing divides the total car cost into monthly payments. PCP only covers a portion.
Hire Purchase is not like Personal Contract Purchase. There are no mileage limitations or damages fees. Hire-purchase is a fixed term agreement that includes fixed monthly payments and a fixed rate until the end.
Should I lease or use PCP?
You should take into consideration several factors that will help you choose the right option for you.
The type of vehicle you intend to use, the amount you are willing to pay for it, and your monthly income will all help you decide which deal to choose.
A PCP agreement is better than leasing if you are determined to own your car.
The majority of those who finance a car with PCP do not go on to make the balloon payment in order to purchase the car. It can often be cheaper to lease a brand new vehicle than to buy it. The monthly payments are usually more affordable than if the car were purchased in the same model.
What is the process of PCP car financing?
You will need to deposit a down payment on your vehicle if you are approved for PCP car financing. This deposit will typically be 10% of the car’s actual value. However, requirements can vary from one provider to another.
The monthly payments will be made over the agreed time period. This will usually take between three to five years. You will still drive the car. These payments will not cover the entire cost of the car, unlike a hire purchase. The estimated depreciation of your vehicle will be covered by the payments for the period you have signed the contract.
The provider will give you an estimate of what your car will sell for at the end. This is called the Guaranteed Minimum Future Valuation. The GMFV is the difference between the car’s current value and the GMFV. This will be used to calculate your monthly payments.
The GMFV determines the cost of the balloon payment. This is the amount that you would have to pay to purchase the car after the PCP agreement ends.
The age and make of your car, as well as the length of the agreement and the mileage restrictions, all have an impact on how much a car will depreciate and how much the GMFV will go up.
The GMFV of a car that holds its value will be higher, so the difference between the car’s worth and this will be lower. This would result in lower monthly payments than if your car’s value is predicted to decline.
If you want to keep the car, you will need to pay an additional balloon payment.
Example of a personal contract purchase
Car Cost: P21,000
GMFV: PS10,000
Deposit: PS2,000
Monthly instalments to pay the amount: PS9,000
APR: 7.2%
Contract term length: 3 years/36 month
Monthly estimated repayments:PS339
Loan cost:PS3,204
Total amount due if you don’t buy a car (excluding deposit): PS12 204
Total loan cost if you choose to purchase a car (excluding any additional fees):PS24.204
Keep in mind that interest will be charged on the entire amount you owe, not just the monthly payments. Your credit score will determine the interest rates and they will differ among providers.
You may be required to pay additional fees if you exceed the mileage limit or return your car with severe damage.
What happens when a PCP car financing contract is over?
You have many options after a PCP agreement ends.
1.Return your car. So long as you keep the car in good condition, have not exceeded any mileage limits or been subject to any other penalties, you can return the car without any additional payments. You can return the car and clear your finance agreement instead of making the balloon payment.
Even if your car is less valuable than you expected, it is still the dealer’s problem. You wouldn’t be required to pay anything.
- You can keep the car. You will need to make a final balloon payment in order to keep the car and be its legal owner. The GMFV (PS10,000 in the above example) will be used as the basis. There may also be an administration fee. Your monthly payments will be significantly lower than the balloon payment.
- You can take out a new PCP agreement. You can return your car to pay the remaining balance. The excess amount can be used as a deposit towards a new finance arrangement. If you decide to do so, however, you might need to remain with the same dealer.
If, for example, the GMFV value of a car was PS10,000 but the car was actually worth PS11,000 at the end, you could use the additional PS1,000 to buy a new car.
There is always the possibility that your car may depreciate faster than you expected. This could leave you without equity to purchase a new vehicle.
Your contract may allow you to modify your car via PCP before it expires. This could come at a cost depending on how much you have to settle your agreement. You would have to pay more than your car’s value to get out of negative equity.
If you wish to terminate your agreement after one year, the finance provider might ask for a settlement amount of PS11,000. However, if your car’s value is less than PS10,000, the finance provider may ask for a settlement figure of PS11,000.
You can cancel your PCP contract by “voluntary termination”, just like other car finance deals. This happens if you have paid 50% or more of total finance amount. It is important to note that the balloon payment is part of the total loan amount. This means that you will not have repaid half the loan through your monthly payments if you reach the halfway point in your contract.
You may have only repaid half of your loan. This gives you the option to cancel your financing through voluntary termination when your contract is almost over. This will not affect your credit rating, but it may show up on credit files and lenders could be hesitant to approve you if this happens often.
Advantages and disadvantages to PCP
The Advantages of PCP
- Every few years, you can switch to a new vehicle.
- Monthly payments that don’t cover the entire car’s value can be lower than those offered by other financing options such as hire purchase.
- There are many options available to you at the conclusion of your contract.
- You can return the car if the value of the car drops more than you thought, and you can walk away.
- This may enable you to buy a car that is more expensive than you would otherwise be able to afford.
- Depreciation won’t affect you unless your plan was to use equity in the car toward a new contract.
PCP’s Disadvantages
- Without paying the final balloon payment, you won’t become the legal owner.
- If you fail to make your payments on time, the lender may take your car.
- There are a variety of restrictions and terms that come with the package, including mileage limits.
- Your finance provider will allow you to sell the car or modify it.
- To avoid any additional charges, you must return your car in a good condition.
- The final balloon payment for the car will be much higher than the standard payments if you wish to keep it.
- If you decide to keep the car, the total amount due can be more than other financing options.
- If the car’s final value is less than or equal to the GMFV, there will be no equity available to deposit in a new finance agreement.
- Because of the high age limit for PCP contracts, some used cars will not be eligible.
- It can’t be used to purchase a car from private sellers.
What is the best PCP for me?
People who plan to change their car often may find it convenient to purchase a car through PCP. You can return your car at any time and get a newer model.
Hire purchase and other forms of financing may be more affordable if you intend to keep your vehicle for the long-term.
People who use PCP aren’t likely to choose to purchase the car after the contract ends.
If you are certain that you don’t want the car to remain in your possession, PCP might not be the best option. Leasing could be cheaper than PCP.
Although PCP is used primarily to finance new cars, it is also available for certain used cars. According to the Finance and Leasing Association, PCP was responsible for more than 75% in new car finance agreements in 2020.
PCP financing can be obtained from many dealers when you purchase your car. However, it is also possible to get PCP finance through independent brokers or finance providers online.
Alternatives to PCP
A personal contract purchase is not the only way to finance your car. It is important to understand all options before making major decisions about purchasing a car. There are many alternatives to purchasing PCP:
- Leasing or personal contract hire
- Hire purchase
- Conditional Sale
- Personal loan
No matter which option you choose to go with, it is important that you fully understand the terms before you sign a contract. You should be aware of any fees that the provider may charge, such as early repayment or excess mileage charges, and any requirements they might have regarding servicing, for example.
Your situation and your financial resources will determine the best car financing.
Lease cars are owned by the finance provider who supplied them. You will need to return the vehicles to them at the end. If you are waiting for delivery of a factory-order car, you may be able to extend your contract for a few more months. The provider will decide if you are allowed to extend your lease. However, it is likely that you will be charged a fee.