Personal Contract Purchase or PCP agreements have been in the news recently, at the heart of the emerging scandal surrounding the mis-selling of car finance deals. Thousands of people have already lodged complaints with their finance company or car dealer, and you may be wondering if you’re also entitled to do this.
We take a detailed look at PCP car finance with a deep dive into all the different aspects.
What Is Personal Contract Purchase (PCP)?
Personal Contract Purchase (PCP) is a type of car finance that allows you to borrow money to buy a car, with a contract that typically lasts 24-60 months depending on your deal. PCP car finance usually has certain key features: –
- You repay the money over the loan term via monthly repayments.
- At the contract, you can choose to return the car, upgrade, or make one final payment (Optional Final Payment) to own it – this is called a balloon payment.
- The agreement usually has an annual mileage limit; if you exceed this, you will be charged per mile for the excess mileage.
- PCP agreements have a Guaranteed Minimum Future Value (GMFV) of the car, which is why they are so popular with motorists who are protected against the car’s depreciation, which is rapid on a new vehicle.
- You don’t have to make the final balloon payment; you can opt to return the car and start again with a fresh finance agreement on a new car.
PCP is very popular, with around 90% of UK motorists choosing this for their car finance. Personal contract purchase offers lower monthly payments than a personal loan or hire purchase (HP) car finance agreement.
How Does PCP Work?
PCP car finance can be a bit tricky to understand, but it can be divided into three key parts: the deposit, which you pay upfront; the amount you borrow, which is repaid via monthly instalments; and the optional final payment or balloon payment at the end of the agreement.
The deposit is usually around 10% of the car’s price, but some car dealers will offer deposits as low as the equivalent of one monthly payment on the finance as an incentive.
The amount you borrow is worked out by the finance company and is essentially their prediction of how much the car’s value will drop over the term of the deal.
The monthly payments cover the car’s depreciation and interest charges.
What Are The Benefits Of PCP Car Finance?
A PCP contract offers many benefits compared to other forms of car finance, and these include: –
- PCP car finance offers lower monthly payments than a personal loan or hire purchase (HP) car finance agreement.
- PCP deals give you greater flexibility than other car finance deals, allowing you to return the car, upgrade, or make one final payment to own it.
- You can choose your annual mileage at the start of your finance agreement. Your finance agreement will state that the car must be maintained in accordance with the manufacturer’s guidelines, although fair wear and tear is acceptable.
- If you want to drive a new car every few years, you can upgrade your car every two or three years with PCP car finance.
Who Is Eligible For PCP Finance?
Eligibility depends on several factors, including your credit score, income and spending, residential status, and any debts you have. The full value of the car you plan to purchase will also be relevant – it’s essential to make sure you can afford the monthly payments.
For your application, you’ll need to provide certain information, including personal details such as your full address history, previous names, job title and employment status, and proof of ID. The finance company will typically perform a credit check to assess your credit rating as part of the application process.
Once your application has been approved, the car finance company will also need your bank account number and sort code to set up the monthly payments.
What To Expect At The End Of The Agreement
At the end of the PCP contract, you can return the car, upgrade, or make one final balloon payment to own it. If you want to keep the vehicle, you’ll need to make the balloon payment, a pre-agreed value based on the car’s estimated worth at the end of the contract.
If you decide you want to return the car, you won’t have to pay the balloon payment, but you’ll need to ensure the car is in good condition and within the agreed mileage limit. The PCP finance agreement usually makes provision for excess mileage at a set rate per mile if you are over the mileage limit.
Personal Contract Purchase And Mis-Selling
For many years, interest charges were inflated on PCP car finance deals in return for the car dealer receiving a discretionary commission payment (DCA) that was hidden from the customer. New PCP car finance deals don’t feature DCAs, as the Financial Conduct Authority banned them in January 2021.
How To Get The Best Deal On PCP Finance
- Shop around and compare deals from different lenders and also from your bank.
- Check the interest rate and APR.
- How much deposit do you need to put down? A larger deposit can lower the monthly payments.
- How long should the PCP agreement be for? A more extended period may lower the monthly payments even more but increase the total cost of the borrowing.
- How easy is it to evidence your work if you are self-employed?
- Do you have a vehicle to part exchange?
- Consider the mileage limit and balloon payment at the end of the contract and how you may want to fund your next car in the future.
- Are there any extra charges like a purchase fee or administration charge?
- Read and understand the contract before signing.