There are a variety of different contractual agreements you can take out when purchasing a new car, and amongst the most popular of them is Personal Contract Purchase. It is an alternative method of finance which is very similar to leasing in that you will pay monthly instalments for your new vehicle. The difference is that you have an optional balloon payment at the end which will result in you being the registered owner of the vehicle. The balloon payment at the end of the contract can be quite an expensive amount, so you will have the choice of either handing the vehicle back to the finance company or are offered the option of refinancing the balloon payment over an additional amount of years. The balloon payment tends to be referred to as the guaranteed minimum future value (GMFV), where the amount owed is dependent upon the equity of the vehicle.
Damage on the vehicle, mileage, and the market value of the car at the time, will also affect the GMFV. The reason as to why this contract type is so popular is because of the choice you have on whether you want to keep the vehicle or hand it back. If youâ€™re set on the idea that you want to replace your vehicle every 2/3/4 years, leasing a car will be more cost-effective and beneficial to you.
PCPs are a good idea if you're looking for cheap monthly rentals and also want the flexible option of both handing the car back, and having the choice to purchase it at the end of the contract. The real benefit to personal contract purchases over leasing is if you aren't fussed about having a brand new vehicle and want a used vehicle instead. The attraction of PCP lays with the low monthly rentals, however many drivers don't tend to think about the balloon payment at the end, which may lead to disappointment if you can't afford to pay it off; you will have to hand the vehicle back and look for another car.
As you now know, a PCP deal is a secured finance agreement. Your debt is secured against the car meaning that the finance company or dealership will be the registered owner of the vehicle until you've paid your lump sum off at the end. If you choose to hand the vehicle back, you will be the registered keeper of the car throughout the contract but not the registered owner.
When we talk about the initial rental on a PCP, it's actually the deposit you're putting down on the car. Finance companies will usually ask for 10% of the vehicle's market value as a deposit. You can usually change the initial rental on PCP contracts, which will, in turn, affect the monthly price you pay for the car.
You have to remember that you will be paying interest over the course of your PCP and the amount of money that you borrow from the finance company will be dependent upon what they believe the vehicle will be worth when the contract ends. (Ie - how much the car depreciates in value)
With PCP, you can take out a contract for both new and used cars.
As we mentioned previously, the feature which differentiates PCP from other contractual agreements is the optional balloon payment you are provided with at the end of the contract. PCPs allow you to hand the vehicle back, pay off the balloon payment outright or refinance the final payment. If you decide against paying the balloon payment, you may find that you've lost the contributions towards it. It would make sense to lease if you're planning to hand the car back to the finance company anyway.
If you're struggling to pay your monthly bills with a PCP, don't worry too much. Under the Consumer Credit Act, you have the right to return the car to the finance company as long as you have already made half of your payments. This process is called 'voluntary termination'. If you are struggling to make payments in the first half of your contract, it would be best to consult the finance company or speak to a debt specialist.
Leasing is the cheapest way of driving a brand new vehicle, and PCP deals have fairly similar monthly rates to leasing, whilst also being cheaper than hire purchases. You can also customize your quote.
The real beauty of PCP is having the choice of whether you want to keep the car or not. You may have decided after a couple of years that you dislike the car you drive, and can simply hand it back at the end of the contract. If you were to take out a hire purchase, you are stuck with the vehicle until you have paid the full amount off. Then, and only then, could you sell the car yourself.
Having fixed monthly payments is incredibly beneficial for anybody who likes to keep track of their spending. Your monthly rate will stay the same, so you needn't worry about any additional costs. (unless you exceed the mileage, or damage the vehicle)
If you've driven over your allocated mileage or have damaged your vehicle in some way, you may be asked to pay excess charges. Minimal damage to the vehicle may be subject to fair, wear, and tear, but major collisions, scratches, and dents could result in additional charges.
If the vehicle has been damaged and you're planning on purchasing the vehicle at the end of your contract, you may find that the vehicle's overall equity may change.
If you decide to refinance your balloon payment, you will have actually ended up spending a lot more than you intended to at the start. This is because of interest over time.
If you do decide to refinance the balloon payment, you will inevitably extend your contract period, meaning that you will be stuck with the same car for many years. If you're keen to have new vehicles every few years, PCP may not be the best idea for you.