PERSONAL CONTRACT PURCHASE - PCP

Personal Contract Purchase (PCP) is a very popular choice for motor finance due to its flexibility, low initial deposit commitment, low monthly repayments and guaranteed value for the vehicle at the end of the agreement. You will probably know or heard of it as Ford Options, Vauxhall Choices etc etc. These are all PCP’s.

This type of finance is ideal if you plan to change your car at the end of the contract period, and change your car often. It can potentially allow you to keep re-newing your car, while maintaining a broadly similar level of payment.

WHAT IS PCP?

Using a Personal Contract Purchase (PCP) plan the customer will make an initial payment, followed by a series of monthly payments and a final large, but optional payment, called a GMFV.

A PCP plan should enable the customer to purchase a new vehicle with lower monthly repayments by deferring a large amount of the total cost of the vehicle to the end of the contract - this amount is known as the Guaranteed Minimum Future Value (GFV), often referred to as the optional final balloon payment. The GMFV is set by the finance company and is based on the chosen vehicle and the annual mileage stipulated by the customer. The annual mileage can be set between 6k and 30k per annum and will affect the figure given for the GMFV.

"With PCP your monthly payments cover the loss in value of the car over time - you're basically paying the monthly depreciation of the car plus the interest on the outstanding balance. At the end of the contract you have the option to buy the car at a previously set price".

HOW ARE THE MONTHLY PAYMENTS CALCULATED?

The Guaranteed Minimum Future Value plus the customer's deposit is subtracted from the cash price of the vehicle and the monthly payments are based on the balance (plus interest on the balance and the GMFV). At the end of the agreement the customer will have a choice of making a final lump sum payment in order to complete the agreement, or to simply return the car to the finance company without any further obligation.

By only repaying the difference between the cash price and the optional balloon payment you are only financing the depreciation of the car. One point to this however is that due to this calculation method, a PCP will typically show a higher APR than a conventional Hire Purchase (HP) loan, even though the flat rates are identical.

WHAT DO I DO AT THE END OF THE CONTRACT?

At the end of the contract you have four options:

1. Return the vehicle to the finance company. As long as you have not exceeded the agreed mileage, you will have nothing more to pay.
2. Keep the vehicle by paying off or refinance the outstanding balloon payment or GMFV.
3. Trade-in your car for a new car. You can come back to Buyacar and part exchange your vehicle for the next new vehicle. If the trade-in value is greater than the GMFV, the difference can be used towards a deposit on the next agreement.
4. Sell the vehicle privately and keep any profit over and above the GMFV (which you will have to pay off before you release the car to its new owner).

WANT TO LOWER YOUR MONTHLY PAYMENT?

Within a PCP quote there are some things you can do to lower your monthly payment.

• Consider financing the car over a longer contract period - perhaps a 36 or 42 month contract will make your car of choice more affordable.
• The amount of deposit you are able to put down will dramatically effect your monthly payments. Higher deposit means lower payments. (Be cautious with this method however, as you are simply “buying” a low payment. The GMFV will not change, so neither will your potential deposit when it falls due. You could find yourself needing to put money in again next time if you want to maintain the payment at the same level)
• It is worth calculating your annual mileage accurately rather than guessing. If you only do 6000 miles per year but have left your annual mileage figure at 10000 miles, your balloon payment will be lower and you will be paying more unnecessarily.

As with any finance arrangement, there will be pros and cons relevant to your individual situation. You’d do well to ensure that you FULLY understand the implications of the PCP, its GMFV and what happens if you go over the mileage limit (usually there is a penalty charge of circa 6-10p for every mile you go over the limit).