If you’ve been researching car finance, you’ve likely come across the term 'personal contract purchase'. We’ll help you understand what it is and whether it’s the right car finance option for you.
What is personal contract purchase?
Personal contract purchase (PCP) is a finance agreement that helps you pay for a new or used car by spreading the cost over fixed monthly instalments – as you would with Hire Purchase.
The difference with PCP is that the amount you borrow covers only the estimated depreciation of the vehicle – meaning that the monthly repayments are usually smaller.
As with hire purchase (HP), you won’t automatically own the car at the end of the agreement, unless you pay extra for it; should you decide you want to buy the car, the total overall cost will usually be greater than an HP arrangement.
The lender owns the vehicle until everything owed under the agreement has been paid, including the option-to-purchase fee. So if you do fail to keep up with your monthly payments then the car could be taken away from you by your lender.
How do PCP deals work?
PCP is similar to a long-term rental, where you have a few options at the end of your finance agreement. The key aspects of a PCP deal include:
Typically this is around 10% of the car’s value (sometimes available with no deposit if the dealer or manufacturer has an offer on).
Your monthly repayments will be determined by your lender’s prediction of how much the car’s value will decline over the period of your deal (known as depreciation), which is typically 24 or 36 months. From this, they take away the deposit to be left with the figure that you’ll have to repay. You’ll also pay interest and any other relevant fees too, all of which is agreed before you sign the agreement.
At the end of your PCP agreement term, you’ll have three options to choose from. You can either:
- Hand back the car and have nothing further to pay (provided that the car is in good condition and that you haven’t exceeded your agreed mileage)
- Buy the car by making a balloon payment (and paying any option-to-purchase fee)
- Get another finance arrangement using the value in the existing vehicle to fund the deposit for your next car – known as part exchange.
What is a balloon payment?
If you choose the option of buying the car at the end of your agreement, you’ll pay what is known as a 'balloon payment' – also sometimes referred to as an Optional Final Payment. This represents the expected value of the vehicle at the end of the term of the agreement and is normally much higher than the monthly payments you’ve been accustomed to paying. So it’s worth bearing in mind if you plan to keep the car to avoid any nasty surprises.
Of course, you don’t have to buy the car if you don’t want to – you could choose to return it and either walk away or get another car on finance.
What is Guaranteed Minimum Future Value?
Also known as Guaranteed Future Value, or GFV for short, this is what you’ll pay as the balloon payment if you choose to keep the car. The finance company responsible for your PCP arrangement determines the amount of the GFV (which is the expected value of the vehicle at the end of the term of the agreement).
This can work in the car buyer’s favour, as it means that the lender bears the risk for the vehicle depreciating more than expected at the outset of the agreement. When you’re calculating a PCP deal, you’ll look at:
● How many miles you’re likely to travel each year (up to 24,000 miles)
● How long the agreement will last (between two to four years)
These help to dictate what the Guaranteed Future Value of your car will be, as well as what your monthly repayments will be.
Personal Contract Purchase FAQs
- Is personal contract purchase the right car finance deal for me?
Whether or not PCP car finance is the right option for you is completely dependent on what you want out of the arrangement. If you would like to keep the car at the end, you might prefer to go with a hire purchase deal which doesn’t come with a large, final balloon payment. However, with hire purchase your monthly repayments will be higher. So really, which is the right finance package for you will depend entirely on your own circumstances.
- Who is a PCP deal available to?
Anyone can apply for a PCP agreement for their car finance. When you apply for car finance, you’ll be subject to credit checks and certain eligibility checks by your lender to help them decide whether they’re able to offer you a finance agreement. To apply for any type of car finance, you’ll need to provide:
● Proof of age (all applicants must be aged 18 years or over to be considered for car finance)
● Proof of address (typically you’ll have to show where you’ve lived for the past three years)
● Details of earnings (personal, and household, if you have dependants such as children)
● Employment status
● A full or provisional, valid UK driving licence
● A guarantor (if requested by your lender).