PCP Deals (Personal Contract Purchase)

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PCP Car Finance

In recent years, a Personal Contract Purchase (PCP) car finance deal has become incredibly popular, which means you pay monthly repayments to drive the car. At the end of the contract, you can opt to pay for it outright at the end – or hand it back if you want to.

The most important advantage of the PCP deal is that it gives you options. At the end of the contract term, you’re not tied to buying the car – but you can if you want to! Your monthly repayments will be considerably cheaper during the contract term than a Hire Purchase or Personal Loan agreement.

How does PCP finance work?

Signing up to PCP finance is a breeze, and you can often be in and out of the dealership in an afternoon!

Firstly, you want to consider a deposit – the more you put down, the less your repayments are. You can often opt to put down just a 1-month deposit if you like.

Secondly, you’ll need to figure out what exact number you’ll be boring. This on the lender to consider how much value will be lost on the car. You’ll also need to consider the interest rates.

Finally, you’ll be told your balloon payment – if you decide to own the car outright at the end of your agreement. Don’t worry, though. You don’t need to decide that at this point!

What happens at the end of a PCP deal?

At the end of a Personal Contract Purchase deal, you have a couple of options. You can either:

Pay a balloon payment and own the car; this is usually a fairly large number (often in the thousands, not hundreds)!

or

Hand the car back, and walk away or take out another PCP on a new car.

What is a balloon payment?

The balloon payment is the figure at the end of the PCP deal you’ll have to pay – if you want to own the car.

This figure is based on the Guaranteed Minimum Future Value (GMFV) of your car. The existence of the balloon payment is why your monthly repayments are considerably lower than with an HP or Personal Loan.

What are the pros and cons of a PCP deal?

While one of the most popular car finance types for young drivers, a Personal Contract Purchase has some drawbacks. Here are the pros and cons:

Pros:

  • Lower monthly repayments than with a Hire Purchase or Personal Loan, meaning you can buy a slightly newer car!
  • You have a lot of flexibility. You can get the car and decide later down the line that you don’t want to own it outright. You have no obligations to pay the balloon payment!

Cons:

  • You’ll have to pay a pretty hefty sum to own your car at the end of the PCP agreement.
  • You’re restricted to a certain amount of miles, and you’ll need to be careful about damaging the car.
  • Some lenders might require you to have a deposit.

Is a PCP deal the right choice for me?

If you’re a young driver who wants to change their car regularly, a Personal Contract Purchase can be a great option.

However, if you’re not the most careful driver or log a lot of miles in your car, then a PCP probably isn’t the right choice for you. You’d probably be better off with a Hire Purchase or Personal Loan!

Hire Purchase vs PCP

The two most common car finance types are the Hire Purchase (HP) and Personal Contract Purchase (PCP) deal. That’s because they’re much easier to get than a personal loan or a car lease. They’re also both quite similar in that you pay a fixed monthly payment to the lender.

However, there are some major differences to consider. If you want to own the car outright eventually and aren’t concerned with higher repayments, go for the HP. You also have the added bonus of no mileage restrictions!

If lower monthly repayments are more important than ownership to you, go for the PCP. But just be aware that you’ll have mileage restrictions, and need to keep the car in tip-top condition if you’re handing it back.

Remember, you can purchase the car at the end of a PCP deal – but you’ll have to pay a chunky payment (balloon payment) to do so!

PCP vs Personal Loan

If you want to own the car, a personal loan is a much better option than the Personal Contract Purchase deal.

You can own the car outright as soon as you hand over the loan money to a dealer! Meaning you have the flexibility to sell or modify your vehicle if you wish.

However, this often isn’t an option for many of us young drivers or first-time drivers. Getting a personal loan can require an excellent credit rating, and the monthly repayments are considerably higher than with a PCP. If you want a newer car every couple of years and don’t care about ownership, opt for the PCP.

PCP vs Car Lease:

A car lease has a lot of similarities to a PCP deal. You pay a set amount per month, have a mileage limit, and need to keep the car in decent condition. However, the main difference is that you have absolutely no opportunity to buy the car at the end of the contract term with a car lease.

However, the upside to this is that your monthly repayments are often lower. In most cases, though, you can only get a car lease on a new car, so even if you don’t want to own the vehicle, a PCP on an older used car might be more affordable for you.