Personal Contract Purchase PCP

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Personal Contact Purchase (PCP)

Personal Contract Purchase (PCP) is similar to hire purchase in that customers are required to pay a deposit and monthly instalments in return for a new car of their choice.

But unlike hire purchase monthly payments with a PCP plan are generally lower, allowing customers to choose from a wider range of cars than thought possible.

PCP is very popular with ex-company car drivers as many schemes include servicing and maintenance costs in the quoted price.

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

Customers will also have to agree on a MGFV which is a minimum guaranteed future value figure, also referred to as a balloon payment. This is usually a large sum, which is worked out using similar factors to that of the monthly payment.

Seen as a way to avoid the depreciation trap, a PCP agreement provides motorists with the option to set up a contract term, with monthly payments. Once the contract term comes to an end, the customer has the following options:

• Pay the MGFV to purchase the vehicle outright
• Hand it back to the contract provider (losing any deposits paid)
• Use the difference between the MGFV and the actual real value of the car as deposit towards a new car
• Swap to another PCP scheme
  
  

How is the monthly payment determined?

There are a number of factors the provider needs to consider in working out the monthly payments of a PCP plan, such as:

• The cost of the vehicle as new
• The amount of deposit being paid by the purchaser
• The length of the contract
• The number of miles that the customer intends to drive each year
• The Minimum Guaranteed Future Value (MGFV), or residual value
• The finance rate
• Maintenance requirements and servicing costs

 

Once all the above factors have been taken into consideration by the dealer, the vehicle is supplied for a set period - usually between 24 and 42 months - at a fixed rental, decided on using all the above factors.

Benefits of PCP

The initial benefits of a PCP plan include:

• The convenience of having fixed monthly payments that are usually lower than other forms of finance, and no other costs to worry about other than fuel and insurance.
• For plans that include maintenance:

• The inclusion of Road Tax for the first year in all cases and then for the remaining term of the contract;
• Having all servicing costs included in the monthly payment cost

• No negative equity – The MGFV of the car is binding under the Consumer Credit Act, meaning that the consumer is protected at all times.
• Being able to choose a brand new car that is probably too expensive to buy outright.
• Being able to avoid all the hassle of reselling

 

Also, if a car is valued at more than the agreed MGFV when handed back to the provider, the customer will pocket the extra amount, which can then be used as a deposit on another car. Drivers are also safe in the knowledge that they will not be required to make up any shortfall should the car be valued at less than the MGFV.

Depreciation

The main worry with new car ownership is the depreciation factor i.e. the difference between the price of the car and the value when selling it is the amount of money lost through depreciation.

PCP can help car buyers lower the depreciation gap as they are given a MGFV (minimum guaranteed future value). This makes it impossible for them to fall into negative equity as the future value of the car is guaranteed at the time of purchase.

Costs involved

The PCP process is carried out in the same way by all providers in the UK . To begin with customers are required to pay a deposit on the car of their choice, followed by monthly payments and a final balloon payment at the end of the contract – if they choose to buy the car outright.

Although the procedure is the same wherever offered, it doesn’t mean that customers will receive the same value for money. Car companies offering PCPs and other PCP providers will offer different policy terms, rates and options.

Getting the Best Deal

In order to get the best deal possible, customers need to take the following factors into consideration:

• The cost of the car when taking out the contract (disregarding all other aspects of the contract)
• The MGFV
• The APR
  
  

As with most things, customers are advised to research and shop around in order to get the best deal possible. As well as high street dealerships, customers should look into what deals and rates are being offered by online providers on the car of their choice. Some dealers will be able to offer a better deal on particular types of car if the customer is adamant they know exactly what they want.

Applicants are also advised to check the depreciation level of the car they have in mind as this can determine whether they opt to buy the car outright at the end of the PCP term or move on to another deal.

It is also important for customers to remember that there are lots of factors that go into calculating the monthly payment. Lower payments don’t necessarily equal a better deal. It might be the case that by making the monthly payments lower, the provider will require a larger deposit or final payment. Therefore customers should check the terms of each contract carefully and make sure they understand them before agreeing on a deal.