PCP Deals

Personal Contract Purchase (PCP) explained

Although new car registrations have been suffering over the last year or so, there’s been a lot of noise made over the last few months about PCP – Personal Contract Purchase. A lot of people are moving over to PCP to avoid the inevitable downside of any new car purchase – depreciation.

What is PCP?

PCP was designed specifically to be a personal contract for private individuals. Should you enter into a PCP plan, it is classed as a conditional sale agreement that offers you protection under the Consumer Credit Act 1974 and the Financial Services Regulations 2004.

Seen as a way to avoid the depreciation trap, a PCP deal allows you the option to set up a contract term, with monthly payments. At the end of the term, you then have the option to purchase the vehicle, or simply hand it back to the contract provider.

Breaking it down

How is the monthly price determined?

There are a number of factors involved when considering the monthly contract price. In order to work out the Personal Contract Purchase payments, the provider will need to take into account:

1. How much the vehicle is costing new
2. How much deposit you are placing on the contract*
3. How long the contract will be over
4. How many miles you are intending to do
5. A GFMV (see below) – or residual value
6. The finance rate
7. Maintenance Requirements.

*deposit up to a maximum of 40% of total value.

So when that has all been covered with the dealer, the vehicle is supplied for a set period, usually between 24-42 months, at a fixed rental, decided on using all the above factors.

Minimum Guaranteed Future Value

You will also agree on a MGFV (or GFV) which is a minimum guaranteed future value figure - sometimes called a balloon payment. This is usually a large sum, which is worked out using similar factors to that of the monthly payment.

When your agreed contract term comes to a close, you have 3 options:

• Pay the GFV and take the car away - it's yours.
• Hand it back and walk away - but you won't get any of your deposit or repayments back.
• Use the difference between the GFV and the actual real value of the car as deposit towards your next car.

The Benefits

So what are the initial benefits of a PCP deal?

You know exactly where you are financially, with fixed monthly payments that are usually lower than other forms of finance.

Road Tax is included for the first year in all cases and then for the life of the contract if maintenance is included.

Buying an older car may seem like a safer option – after all, it will be cheaper to buy. However, one large bill can completely wipe out any saving you made on buying the older vehicle. If you go for a PCP with maintenance included, you won’t have any service or repair bills to pay for – it’s all included in the cost of your monthly payment.

There’s no negative equity and can be less risk of depreciation:

Depreciation

Depreciation is the biggest single cost of new car ownership, so getting the best deal offsets the cost of buying the next new one. The difference between what you paid for the car new and what you get when you sell is the amount of money you have lost in depreciation.

The aim of many people is to reduce this gap as much as possible - PCP does this by guaranteeing a GFV, and therefore to fall into negative equity is not possible as the future value is guaranteed at the time of purchase.

Common Myths

Is it Complicated?

PCP isn’t complicated at all. It’s a standard contract wherever you go and as it’s regulated by the the Consumer Credit Act 1974, you know you’ll be safe when you enter into the agreement.

Is it More Expensive?

With a PCP deal, you get the benefit of lower monthly payments and paying off the loan at the end. This does mean that you are paying for a 3 year old car, but with the GFV, you cannot get into negative equity, and this alone makes it extremely attractive to those of us who have fallen into that trap before.

There are those that argue that PCP works out more expensive as you pay a lump sum for a 3 year old car, but you have had the car from new . Obviously as with buying a car from anywhere, the expense incurred will depend on how hard you are prepared to look for a good deal.

Unfortunately, although the PCP procedure will be the same wherever you go (deposit, monthly payments, balloon payment etc), that doesn't mean that you will get the same value for money wherever you go.

Getting the Best Deal

So how do you make sure you are getting the best deal?

Whether or not you get a good deal comes down to a few different factors – the main ones being:

1. The price the provider is putting on the car when you take out the contract (e.g. How much you are being asked to pay for the new car with all the other aspects of the contract taken away)
2. The APR – As with any finance deal, a lot can depend on the rate.
3. The GFVP

Bearing this in mind, there are several ways to ensure that you are getting the best offer for you:

1. Do your research and shop around. Some dealers will be able to do you a better deal on particular types of car if you are adamant that you know what you want. Of course in most cases it really does pay to be flexible as it gives you more leverage.
2. Sometimes you will find that if there has been a make of car that has been very popular, that car will have been over-produced to meet demand. If this is the case it's very likely you'll be able to get a better deal on that particular car - as the dealers want to shift them, and because there are a lot of them about, they will have to keep the prices competitive.
3. So if you have a particular make or model in mind, it's worth shopping around to find out who has them at the best prices to buy, and enquiring about PCP deals from there.
4. Don't allow yourself to be blindsided into paying over the odds for a car because you don't have to pay for it all at once. Ask yourself that if you were buying upfront, would you be happy with the deal or would it be too expensive for you? If you wouldn't pay for it upfront, it's not worth it.
5. Don't assume that because the monthly payments are lower on one car than another, that it is a better deal. Of course it may look more attractive, but remember that there are a lot of factors that go into calculating the monthly payment and to get the monthly payments lower, the deposit or final payment may be much higher. You need all the facts on all the deals before you can begin to make that decision, so don't take things on face value - in other words, don't assume anything.
6. The APR. This is one that most of us are used to. If you've ever bought anything on finance, or borrowed any money, you'll know what a difference the APR can make. Most of us would never be able to buy our homes if the APR on a mortgage was anything like it is on a regular bank loan. The average APR at the moment seems to be around 7%, though if you haggle, you may get a better deal.

Shopping Around

It's exactly like buying something from a shop or booking a holiday. We all know there's nothing more annoying and frustrating than having a great time on holiday, only to find that several people staying at the same place have paid a fraction of the price that you did because they shopped around for the best deal. The same is true of PCP. Just because the process of PCP will be the same wherever you go doesn’t mean the expense will be.

Loan or PCP?

So which is cheaper – a loan or PCP?

To compare finance prices, I chose a personal loan, which is one of the most popular ways to finance a new car – and compared it with the same vehicle on PCP.

The results follow (please note these are purely for illustration purposes and are based upon car prices and finance options available at the time of writing. You should perform your own comparisons before making any decsion regarding financing your car purchase whether loan, PCP, HP or other):

Ford Focus 1.6 Style 5dr Hatchback
OTR price : £13,449.00

PCP contract

Loan

What Does This Mean

So, is Personal Contract Purchase is better than a loan?

In the case above, it is more beneficial to go for the PCP option, than the loan, if you want to reduce your monthly payments. The total you pay over the term of the contract will be higher though in this case. Note that if you wanted to extend the term of the loan to reduce the monthly payment to that of the PCP deal, then the total amount payable on the loan increase greatly. It is also worth noting that any personal loan over £25k has to take the form of a secured homeowner loan in which case the interest rates tend to be much greater. You will often find both the monthly payment and total amount payable are considerably less if you choose the PCP option in this case. There are further advantages to Personal Contract Purchase (PCP) including the benefits outlined below.

1. Most important for a lot of people is that there is no chance of negative equity. You have a agreed a guaranteed future value of the car, which is bound by the consumer credit act so even in the unlikely event of the bottom falling out of the car industry, you would be protected.
2. Of course, the loan cost does not include the money you lose in depreciation. If you choose to sell your car after 3/4 years, then you will have to take the hit, and sell your car for the market value, which may be less, or more than the GFV. In the case of PCP, the provider will take the hit or pay you the difference. If you have paid upfront for the car, it's you that takes the hit on both counts.
3. In most cases, the car acts as security against your loan. If you need to take out an unsecured loan the chances are your APR will be higher than if the loan was secured. However if you take out a secured loan, it will usually be secured on your property or business if you have one. If things were to go wrong and your income is altered, you could end up losing more than just your car unless you have taken out extra loan protection which can be expensive. You could end up losing your house too if your loan is secured against it. If you have taken out early termination insurance (check), then you should be covered for any loss of job etc.
4. You always have the option to hand back your car at the end of the term, and avoid all the hassle of reselling. It’s worth noting too, that if you are handing your car back to the provider, and it is valued at more than the agreed GFV, then you will get the extra back, which you can then use as either a deposit on another car. However, should the car be valued at LESS than the GFV then you wil not have to make up the shortfall. Of course, if you have paid upfront for a car, then you have to take the hit and move on.
5. Always attractive, is the fact that you can have a car from new that you otherwise might not be able to afford. When you come to the end of the contract you know the car well enough to decide if you want to keep it. It’s also a great preference to some people that the car has been theirs from new, so they know its history, and that it has been treated well.

The lower monthly payments allow you to budget well, and the extra interest that you spend on a loan, could well be more than the GFV that you have on your car, so to sell it after paying off your loan would give you a double whammy – the interest + possible negative equity or at least, no guarantee on future value.

For many people though, it's the convenience of having lower monthly fixed payments, and the peace of mind that you have nothing to pay other than fuel and insurance. And the knowledge that there’s no chance of falling into the dreaded negative equity trap.

Of course, you need to make sure that if you are borrowing money from any source, under any scheme, you have to shop around and get the best deal.

Essentially, with PCP, you break the inevitable depreciation into manageable monthly chunks and add them to your contract. This can either help you build a deposit towards your next car, or guarantee you a positive cash value should you decide to buy the car at the end of the term.

If you choose your car carefully and go for one with anticipated low depreciation, on the right plan with a low final payment, you can’t really go wrong.

What Next?

Now you've got all the facts at your disposal, you're probably ready to find out how much it will cost for the car of your choice. To do this, why not use the free, no-obligation Askaprice service to compare PCP deals? Our service allows you to receive multiple quotes from several competitive car leasing companies who attempt to outbid each other for your custom, saving you time, effort, and most importantly, money.

To get your quotes, click on the link below: