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PCP explained - Personal Contract Purchase

Published 29 April 2016

A PCP, or personal contract purchase, is a way of financing a new car. With monthly payments, it is similar in principle to hire purchase, but the amount paid each month is smaller. This is because instead of paying off the entire value of the car over the term of the agreement, the customer is only paying off the depreciation.

People choosing a PCP will usually have to pay a deposit, followed by a monthly payment for the rest of the term. At the end, the customer has the option of buying the car by paying the outstanding value, often called a balloon payment, or taking out a PCP on a new car. The guaranteed future value is the mechanism upon which the deposit and monthly payments are calculated.

They are based around the length of time people usually keep a new car, typically three or four years. For example, if a car priced at £20,000 was offered on a PCP, the customer might be required to put down a 20 per cent deposit. The agreed value of the car after three years might be £7000.

Therefore, the payments over 36 months would be the differential between the deposit and the guaranteed value of the car, which in this case is £9000. The monthly payments would then amount to £250, and at the end of the term, the customer could choose to pay the agreed future value of the car (£7000) to buy it outright, or decide to choose another car on PCP.

For a £15,000 car on a four-year PCP, with a guaranteed future value of £3600 after a 20 per cent deposit (£3000), would require 48 monthly payments of £175.

These examples are simple calculations based on no interest payments on the finance, but it’s likely that interest could apply. Therefore the total payments, including the final balloon payment, would exceed the total value of the vehicle when new.

Cars with strong predicted residual values will often have a higher guaranteed future value. While this might make them a bit less affordable at the end of the terms should the customer decide to buy the car, it usually means modest monthly payments. It also means cars such as the Volkswagen Golf, Mini and BMW 3 Series often have attractive PCP rates.

PCPs are usually offered by manufacturers’ own finance companies, and are often given a specific name by the individual brand...

PCPs are usually offered by manufacturers’ own finance companies, and are often given a specific name by the individual brand, such as Volkswagen Solutions, Ford Options or BMW Select.

Depreciation is usually the biggest cost associated with owning a new car. With a PCP, the customer gets the benefit of a new car without having to pay for the vehicle outright.

However, as the car will have an agreed value at the end of the term, the servicing schedule must be maintained, and there would be a cash penalty for exceeding an agreed mileage (typically set at 10,000 miles a year).

It also means the finance company rather than the customer owns the car, unless the finance is settled at the end of the term if the customer pays the balloon payment. But as almost all cars depreciate as soon as they leave the forecourt, it’s easy to see the appeal of not owning such a high-value depreciating asset.

It’s possible to settle a PCP earlier than the agreed length of the finance agreement, but customers would need to check specific rules before signing up. The value of the vehicle is only guaranteed at the end of the agreed time, so the customer might need to cover any shortfall in value. And there are often charges for early termination, but they are not normally large.

In fact, when certain manufacturer incentives on particular cars occur, dealers might encourage PCP customers to change into a new vehicle before the end of the agreement, and make is relatively easy to do so, without the customer incurring prohibitive charges.

It is important to read and understand the terms of the agreement before signing. Any interest or fees would mean a higher amount would ultimately be paid than the monthly payments, and there are other costs associated with running a car which will not be included in the PCP, such as fuel, servicing, maintenance and repair, and insurance.

If you usually change your new car every few years, a PCP would likely be the most cost effective way of procuring a car (or van). If you typically keep a vehicle for longer, then hire purchase could be a better way of financing it.


CaptainT    on 22 January 2018

I bought my first new car in 2011 because I could not get a nearly new one (ex. demo, etc.) for cheaper. I got 12.5% off the retail which included a dealer contribution of around £1500 for taking out finance. I paid one instalment and then paid off the rest saving the 7.5%, or so, interest. I did the same with the second three years later on which I had an 18.5% discount. Both included three years free servicing and breakdown cover. Both cars cost circa £32.5k. I still have the 2014 one as the same model now costs £52k. with minimal, if any, discounts available. Strange that none of the road tests mention this rather important fact! I am not sure any finance deal would have beaten my total cost. The first one sold privately for £19.5k. and the second is worth around £16k. That does presume the cash is available. On the other hand, the only other possibility is to invest the cash to beat the interest rate which at 7.5% would be a very good achievement! Both cars were a Jaguar XF 3.0D and was/is utterly fantastic to drive and trouble free.

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Representative example

Borrowing £7,500 over 4 years with a representative APR of 25.4%, an annual interest rate of 25.4% (Fixed) and a deposit of £0.00, the amount payable would be £239.77 per month, with a total cost of credit of £4,008.96 and a total amount payable of £11,508.96.

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