PCP Deals

When buying your car these days, you’ll find that most people opt for Personal Contract Purchase (PCP deals). It offers lower monthly payments, meaning you can likely get a better car than you could otherwise.

As it’s so popular, manufacturers have begun offering more appealing deals on new cars. A new vehicle can mean up-to-date tech and peace of mind. You’ll have something reliable and don’t need to worry about getting its MOT done for three years.

However, a new car doesn’t feel worth the money for many of us. Cars depreciate as soon as you drive them away from the dealership! Thankfully, PCP finance deals are also available on used vehicles.

Monthly payments on a Personal Contract Purchase are considerably cheaper than other car finance deals during the contract term – PCP car finance delays a large part of the payment until the end of the contract.

The flexibility of a PCP deal means that annual mileage, length of the finance agreement and even a lower deposit amount are adaptable to your needs.

The distinct advantage of Personal Contract Purchase is they give you options. You don’t have to buy the vehicle at the end of the contract term, but you can!

Deposit – At the start of the finance agreement, you want to consider a deposit – although no deposit PCP deals are available, the more you put down, the less your repayments are. If you wish, you can often pay just a one-month initial deposit.

Monthly payments – the amount you borrow and pay back with monthly instalments is – the value the dealer/finance company estimate the car will depreciate over the agreement term.

Balloon payment also GMFV – Finally, you’ll need to pay the Guaranteed Minimum Future Value if you want to keep the car after your PCP finance agreement. Don’t worry, though. You don’t need to decide until the end of the deal!

Mileage – With PCP deals, you must agree to a total mileage limit for the car; this helps the finance company calculate the amount the vehicle will depreciate. You’ll get charged if the vehicle has excess mileage.

Damage – car finance companies expect on return of the car the condition to correspond with the age and mileage of the vehicle and will accept damage deemed to be fair wear and tear. Damage penalties will apply if the car is not up to scratch.

The Guaranteed Minimum Future Value (GMFV), also affectionally known as the ‘Balloon’, makes PCP deals unique from other car finance.

The payment of the GMFV is optional and does not occur until the end of the finance agreement. That is why monthly payments during the agreement are considerably lower with PCP than with other car finance.

At the end of the PCP agreement, it is the ‘Balloon’ you’ll have to pay to keep the vehicle.

Setting up the agreement

Suppose you want to finance a new car worth £12,000 over 36 months. And you pay a 10% deposit, that’s £1,200.

Your loan is £10,800 (£12,000 less the £1,200 deposit).

Next: The finance company calculates the vehicle’s future value will be £7000 (the GMFV) at the end of the 36 months.

What you pay

The PCP loan is £10,800: However, because the car’s value at the end of the contract is £7,000 (the GMFV), you only repay the difference of £3,800 (£10,800 less £7,000) (plus interest on the £10,800) over the 36 months.

You’ll pay interest on the total value of the loan, even if you return the car.

Your options at the end of the contract

You pay £7000 to own the car or return the vehicle with nothing to pay (assuming there is no damage and you’ve kept to the agreed mileage).

Check these details when comparing PCP offers

• APR, you’ll be paying.
• Total amount repayable to buy the car at the end of the contract.
• The total cost of interest.
• Any additional fees.

You’ll find that manufacturers might offer no deposit or contributions, low-interest rates, and sometimes incentives such as free servicing. It’s also common for many manufacturers to provide reasonable trade-in on a part exchange on your existing car.

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

Yes, you can, but it’s a bit more involved because of the car’s age.

Perhaps the best of both worlds, many manufacturers offer ‘Approved Used’ cars. These are used vehicles that the manufacturer’s mechanics have thoroughly checked over, and they typically come with a warranty. While they’re a bit more expensive than a used car from Dave down the road, they’re likely to be newer and more reliable.

Whether you go for a PCP deal on a used or a new car, it works more or less the same. A Personal Contract Purchase on a used vehicle will require an initial deposit and monthly payments over the stated term (usually) two to four years. You can either give the car back or pay a final amount to own the vehicle outright at the end of the term. This balloon payment is usually a few thousand. Finance Companies can charge monthly repayments lower than most other deals by adding this payment at the end.

While you can use manufacturer-backed finance, you can also get PCP finance from a car dealer or online broker. You’re not limited to ‘approved used’ cars. Many lenders will offer Personal Contract Purchases on second-hand vehicles.

It is up to the lender whether they decide to offer this finance deal on a used car. It’s essential for the finance company that the future value of the second-hand car won’t be too low or hard to predict (as this influences the balloon payment). If you shop around, you’ll likely be able to find a used car at low monthly payments.

Some finance lenders won’t offer Personal Contract Purchase on certain cars – the final value of the vehicle will either be too low or too volatile to predict. For example, many lenders won’t lend on a car that will be ten years old (or over 100,000 miles) at the end of the contract term. You’ll need to look at this on a case-by-case basis, but generally, lower monthly payments are possible to get on second-hand cars up to a few years old.

In most cases, you’ll have to get the vehicle MOT’d and serviced during the PCP term (unless the car is new). If you get the vehicle from the manufacturer, you might need to get it serviced at an official manufacturer’s garage. If you get it from another finance company, you can get it seen at a ‘reliable garage’ of your choice.

If you’ve been looking around at cars, you’ve probably seen some advertisements with attractive PCP finance deals. These often include buzzwords like ‘0% interest rates’, ‘deposit contributions’, or even ‘no deposit’. The best deals will come from the manufacturer, and rarely will you find similar deals on used cars.

Unfortunately, you will unlikely find no deposit PCP deals on used cars. Most will require a deposit of around 10-25%, and it’s rare to see any other incentives.

There’s no hard and fast rule for how long a PCP deal can last. It’s really at the lender’s discretion. However, you can typically expect two to five years contract lengths. The shorter the finance agreement, the higher the monthly payments will cost you – but the quicker you can swap the car for something new.

If you’re applying for a PCP deal on a used car, you might find that you’re only offered a three-year maximum term on some vehicles. The car might be too old by the time you hand it back to be profitable for the finance company.

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

• Hand the car back and nothing more to pay. (Unless you have mileage or damage penalties)
• Pay the optional final payment and own the vehicle; this is usually a relatively large number (often in the thousands!)
• If the car is worth more than the GMFV, you can return the car and use that equity towards a new PCP.

The main way drivers can get money back is through ‘trading in’ a car on PCP with equity. That means that the place you’re purchasing a new vehicle will effectively pay off your current vehicle’s finances. Putting the extra value in the car towards the one they’re selling you.

While one of the most popular finance options, a Personal Contract Purchase has some drawbacks. Here are the pros and cons:

Pros:

• You can drive a newer car.
• Lower monthly repayments than other car finance, where you keep the vehicle at the end of the contract!
• You have a lot of flexibility at the end of the agreement. You can get the car and decide later you don’t want to own it outright. You have no obligation to pay the optional final payment!

Cons:

• You’ll have to pay a pretty hefty sum to own the car at the end of the PCP car finance agreement.
• You’ll need to agree to an annual mileage and be careful about the car’s wear and tear or damage.
• Some finance companies might require you to pay an initial deposit.

The Hire Purchase HP and Personal Contract Purchase deals are the most common car finance options. They’re much easier to get than a personal loan or a car lease. They’re also similar in that you pay fixed monthly payments to the finance company.

However, there are some significant differences to consider. If you want to own the car at the end of the finance agreement and aren’t concerned with higher repayments, go for the HP. You also have the bonus of no mileage restrictions!

If lower monthly repayments are more important than ownership, you’ll want the Personal Contract Purchase PCP deal. But be aware that you’ll have mileage restrictions, and need to keep the vehicle in tip-top condition if you’re handing it back.

You can purchase the vehicle at the end of a Personal Contract Purchase PCP deal, but you’ll have to pay a chunky (balloon payment)!

If you want to own a car, a personal loan is a better choice than a Personal Contract Purchase deal (sometimes called PCP car leasing).

You own the vehicle immediately after you hand the money to the dealer! You have the flexibility to sell or modify your car if you wish.

However, car loans often aren’t a choice for younger drivers or those with poor credit. Getting personal finance can require an excellent credit rating. The monthly payments are considerably higher than with PCP finance.

If you want a newer vehicle every couple of years and don’t care about ownership, opt for the PCP.

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

However, the upside is that your monthly payment is often lower. Usually, you can only get a car lease on a new vehicle. A Personal Contract Purchase might be more affordable even if you don’t want to own the car.

Suppose you wish to return a car under a Personal Contract Purchase deal early. You can end the contract whenever you want!

The lender will calculate a settlement price you need to pay to end the contract.

When calculating the settlement amount, the finance company can only charge you up to two months’ interest on the balance.

Ending the contract early should reduce the interest you pay compared with continuing with the PCP finance. On owning the car outright, you can keep or resell the vehicle.

Under the Consumeryou’ret Act 1974, you can return a vehicle on a Personal Contract Purchase deal with nothing more to pay if you have paid at least 50% of the total finance – this is called Voluntary Termination.

If you’re a 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 many miles in your vehicle, then a PCP vehicle deal might not be the right choice. You’d probably be better off with a Hire Purchase or Personal finance!