When it comes to financing a vehicle, it can be hard to understand the different types of vehicle finance available and which is the right one for you.
Personal Contract Purchase (PCP) is the fastest growing method of funding a vehicle purchase.
It’s similar to hire purchase (HP) in that there’s a deposit to pay, a fixed interest rate, and monthly repayments over a choice of lending terms, which are usually between 12 and 48 months.
While PCP is a variation of a hire purchase agreement, one key difference is that the value of the vehicle at the end of the agreement is calculated during the start of the agreement and this value is deferred. This deferred sum is usually referred to as the Guaranteed Minimum Future Value (GMFV) and is based upon a number of factors including how old the vehicle will be at the end of the agreement and how many miles it would have covered.
There is often a maximum deposit payable and the future value of the vehicle is set by the lender so this will not fluctuate. Deferring the GMFV to the end of the agreement means that your regular monthly payments are lower than those on a comparable HP agreement over the same term.
What happens when a PCP agreement ends?
Another way PCP differs from hire purchase is what happens at the end of the term. At this point you’ll have three choices. You can:
Return the car to the lender, with nothing more to pay (subject to mileage and condition).
Keep the car, simply pay the final amount due on the agreement.
Trade the car in against a replacement using any equity as deposit against your new vehicle.
The first option, returning the car, costs nothing, unless you’ve gone over an agreed mileage or failed to return it in good condition. In either case there’ll be an excess to pay.
Keeping the car means making a final ‘balloon’ payment. This amount is the car’s minimum guaranteed future value set at the start of the agreement. If you exercise this final buying option, you can of course keep running the car, or you can sell it, pocketing any equity above the MGFV that you’ve paid back.
If you’re treading the car in, any MGFV equity can be used as a deposit towards the next one.
Is PCP suitable for me?
A PCP may be suitable for you if:
· You have a low deposit.
· You want lower monthly repayments.
· You like the flexibility to change/update your vehicle on a regular basis.
· You would like to avoid the potential cost of long term ownership/maintenance bills.
Points to consider
Before deciding whether or not to go ahead with a PCP agreement on a car, there are a few more factors worth considering first:
· If you decide you’re going to keep the vehicle, you do not own the vehicle until the final payment has been made to include any administration fees.
· A portion of the credit for the vehicle is deferred until the end of the agreement, this will need to be settled if you want to own the vehicle outright and should be prepared for.
· Your vehicle is at risk of repossession if you do not maintain the payments as set out in the agreement.
· You must have fully comprehensive insurance for the vehicle.