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  • What is Personal Contract Purchase (PCP)?

    Personal Contract Purchase

    A personal contract purchase is one of the most popular ways to finance a vehicle as it offers more flexibility and lower monthly instalments, making it more affordable.

    These monthly instalments go towards the purchase of the new vehicle, but in lower monthly payments than other types of finance. This gives more flexibility to the consumer and can sometimes make it a more attractive offer. An initial deposit is usually required, and then monthly payments are agreed after that.

    Guaranteed Minimum Future Value

    The other difference is that the value of the car at the end of the agreement will be worked out prior to the PCP payments. This means you’re covering any depreciation costs on the vehicle, rather than the total amount of the car. This amount is called the Guaranteed Minimum Future Value (GMFV).

    This is calculated by the estimated miles the car will have travelled and the length of the agreement that is put in place. The amount is guaranteed so customers won’t need to worry about any changes to the market.

    Even more flexibility

    Towards the end of the plan a PCP can provide even more flexibility in three options.
    1)    You have the choice whether to own the car outright by paying the GMFV – a ‘balloon’ payment.
    2)    Any value of the car over the GMFV can be used on a new car PCP contract.
    3)    The car can be returned with the appropriate mileage and in good condition with no more to pay.

    Main benefits of Personal Contract Purchase

    One of the main benefits, as mentioned previously, is the flexibility this type of agreement can give, in addition to the lower monthly payments in comparison to other types of finance. There are also a few additional benefits this contract can give:

    • A low deposit at the beginning of the contract term
    • Your agreement is regulated under the Financial Conduct Authority and protected under the Consumer Credit Act 1974
    • You have the additional flexibility of what to do with the car at the end of the term
    • Monthly payments remain fixed during the term
    • Lower level of risk for the consumer as the GMFV is fixed
    • There is the option of Voluntary Termination too before the term is up.

    What are the downsides of PCP?

    Like most contracts, there are some downsides of investing in a PCP that consumers should be aware of.
    During the term, it’s really important to maintain the car’s maintenance in terms of the service history as well as the condition of the car. Customers will be charged for any damage if the vehicle is returned to the lender at the end of the contract.

    In addition to this, any mileage over the miles agreed within the term will give you further penalties to pay. Therefore, it’s really important to read your contracts and be fully informed with all the facts when you take out a PCP agreement.

    A hire purchase agreement can sometimes be cheaper instead when any penalties are involved. So it’s really key if you take out this type of agreement that you look after your vehicle, unless you definitely plan on keeping it after the term ends.

    How do I know if PCP is right for me?

    This type of contract is ideal if you want a new car from the same manufacturer after the end of the term, but if you’ve had a bad experience and want to walk away, you won’t get any of the money back. Payments moving forward, will then cease. It’s great for those that want a car for the short term without the financial burden of a hire purchase agreement.

    If you’re looking to buy a car outright at the end, a hire purchase agreement may be the better bet for you. PCP, more than often, will prove more expensive if you’re looking at keeping the car at the end of the term. But if you’re looking to trade it in or hand it back, a PCP is a much better option.

    If that’s the plan for you, then great! Just remember to think through your estimated annual mileage carefully and keep it in good condition, and you’ll miss out on any of the extra charges.

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