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  • What is Personal Contract Purchase (PCP)?

    Personal Contract Purchase

    If you're wondering about the smartest way to finance your next car, you've probably come across a personal contract purchase or PCP. So, what is a personal contract purchase? It's a flexible and popular method that can make owning a vehicle more affordable and hassle-free. Let's dive into the details to help you understand if it's the right fit for your needs.

    What is PCP finance?

    PCP is an adaptable car financing option designed to make owning your dream car more accessible. It differentiates itself from conventional personal loans or hire purchase (HP) agreements by offering lower monthly payments. It can be particularly appealing if you enjoy changing your vehicle regularly.

    However, it's important to note that PCP finance is secured against the car itself. While this helps make the financing more accessible, it also means that if you struggle to meet the repayments, there is a risk of losing the vehicle. It's crucial to manage your finances responsibly to fully enjoy the benefits of PCP.

    Here's how it works:

    Guaranteed Minimum Future Value (GMFV)

    When you choose PCP, the car's future value is calculated at the very start of your agreement. This value, known as the Guaranteed Minimum Future Value (GMFV), factors in variables like expected mileage and the duration of your contract.

    GMFV example

    Let's say you're interested in a brand-new car with a retail price of £30,000. You decide to go for a PCP finance deal with a contract term of three years. At the beginning of your agreement, the finance provider estimates that the car will have a value of £15,000 at the end of those three years based on factors like the expected mileage and depreciation. This estimated value of £15,000 becomes the GMFV for your PCP agreement.

    Throughout your contract, you'll make monthly payments covering the depreciation of the car, plus interest. When your PCP term comes to an end, you have the option to:

    1. Pay the GMFV of £15,000 and own the car outright.

    2. Return the car, having met the agreed-upon conditions, with no further payments.

    3. Use any surplus value over the GMFV as a deposit for a new PCP agreement on a different vehicle.

    The GMFV acts as a benchmark, giving you clarity and assurance about the car's value at the end of your PCP. It’s a fixed figure, regardless of market fluctuations.

    What are the key benefits of PCP?

    We want to make your car ownership experience as smooth as possible. Here's why PCP could be the right choice for you:

    • Lower initial deposit: PCP often requires a smaller upfront deposit, making it easier to get behind the wheel.
    • Regulated and protected: PCP agreements are regulated by the Financial Conduct Authority, and they benefit from protection under the Consumer Credit Act 1974.
    • Your car, your choice: You have the power to decide what to do with your car at the end of your term.
    • Steady payments: Monthly payments stay consistent throughout your agreement, so you can budget with confidence.
    • Reduced risk: The fixed GMFV minimises your financial risk.
    • Voluntary termination: If something unexpected happens, you can explore voluntary termination before your contract ends.

    Considering the downsides

    We believe in transparency, and there are some factors to keep in mind:

    • Maintenance matters: Take good care of your vehicle during the term. Any damage upon return may result in charges.
    • Manage your mileage: Exceeding the agreed-upon mileage can lead to penalties. Carefully assess your needs to avoid surprises.

    Is PCP right for you?

    Your unique circumstances and preferences matter. PCP is an excellent choice if you're considering a new car from the same manufacturer at the end of your term. However, if you're thinking of walking away, remember that you won't receive any funds back, and payments will cease.

    PCP is ideal for short-term vehicle needs without the full financial commitment of a hire purchase agreement. If your goal is outright ownership at the end, a hire purchase agreement might suit you better. While PCP can sometimes prove more expensive if you plan to keep the car, it's a fantastic option if you're looking to trade it in or return it. Just keep an eye on your estimated annual mileage and vehicle condition to avoid any additional charges.


    How is PCP different from a car loan?

    PCP often offers lower monthly payments than traditional car loans because you're not financing the entire purchase price of the car. You're essentially paying for the depreciation and not the full vehicle cost.

    Can I negotiate the GMFV?

    When your contract begins, it may be possible to discuss the GMFV with your lender and potentially negotiate for a higher GMFV. This adjustment can lead to lower monthly payments, which can be more manageable for your budget.

    What happens if I want to end my PCP agreement early?

    You can explore voluntary termination, but it's essential to understand the terms and conditions outlined in your contract. Voluntary termination may incur additional charges if you've not yet reached the halfway point of your agreement.

    My PCP agreement is coming to an end, what should I do?

    When your PCP term comes to an end, you'll find yourself with several choices:

    1. Ownership: If you've fallen in love with your car, you can choose to own it outright by making a final "balloon" payment equal to the GMFV.

    2. Upgrade: Got your eye on the latest model? If the car's value exceeds the GMFV, you can use that extra value as a deposit for a new PCP contract on a different vehicle.

    3. Return: Prefer to switch things up? As long as your vehicle is in good condition and meets the agreed-upon mileage, you can return it without any extra charges.

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