Personal contract purchases are an increasingly popular car finance option. But how do they work and why might you go down this route?
Buying a car using a personal contract purchase (PCP) car finance plan is quickly becoming an attractive option for many. PCPs made up 76% of all new car finance deals in the year to March 2016. One reason this may be is that monthly repayments are usually cheaper than on other types of car finance. Plus, you don’t have to keep the car at the end (unless you want to).
But while personal contract purchases might be a good fit if you like to change your car regularly, they’re not necessarily right for everyone.
What is a personal contract purchase?
In a personal contract purchase, you hire a car from a dealer or lender for a set term, usually up to five years. You have to pay a deposit upfront (usually 10% of the car’s purchase price). After that you can use the car while making monthly payments for it.
The total repayment amount is agreed upfront with the lender (the car finance provider) and covers how much the car will go down in value over the terms of your agreement. You're not paying for the full cost of the car like you do with hire purchase.
Here's an example of how much you might pay:
The car’s purchase price is £10,000. You pay a 10% deposit, that is £1,000.
The lender decides that the car will be worth at least £6,000 when the agreement ends. This is called the 'minimum guaranteed future value'.
This means the depreciation total is £3000 plus the £1000 deposit you already paid. Therefore your total monthly repayments over the term of the deal will be £4000 (plus interest)
Your monthly repayments with a personal contract purchase are likely to be lower than with other types of car finance. If you bought the same car using Hire Purchase, for example, your monthly payments would come closer to covering the full £10,000.
Because you don't own the car there will be some terms and conditions attached regarding how you can use it. For example, there may be a mileage limit, and you usually have to make sure you service the car regularly.
This may sound pretty attractive but it's worth checking if it will actually save you money. Lots of dealerships only offer 0% finance deals on their more expensive cars.
What happens at the end of a personal contract purchase?
At the end of a personal contract purchase, you have three options:
1. Trade the car in for a brand new one
This is the most popular option, and the reason why most people opt for a personal contract purchase in the first place. If the car is in good enough condition, the dealership will accept it in place of a deposit on a new car.
You can get a fairly good estimate of your car’s value using AutoTrader’s free car valuation calculator.
2. Return the car and walk away
If you decide to return the car, you’ll need to submit it to an inspection. You’ll have to pay for repairs if there’s any damage. You may also pay additional charges if you've exceeded your mileage allowance.
3. Purchase the car
To purchase the car, you’ll need to pay a lump sum called a ‘balloon’ payment. This sum is usually agreed in advance. It’s what the dealership thinks the car will be worth at the end of the contract.
However, it differs in one key way. You cannot purchase the car outright when the contract is up. This means you’ll need to be a bit more careful with the car. You can’t avoid expensive repairs or a hefty excess mileage penalty by buying the car at the end.
What are the pros and cons of a personal contract purchase?
- Low monthly repayments
Your monthly payments cover what the car loses in value during the contract, not the full purchase price. This means they’re typically lower - and therefore more affordable - than the payments on other types of car finance.
- You’re protected from any loss in value
Your lender guarantees that the car will be worth at least a certain amount at the end of the contract. This is known as the ‘minimum guaranteed future value'. If its actual value is lower, you can return the car and walk away. Your lender will take the financial hit.
- The monthly payment may include road tax and other extras
Road tax is usually included in the monthly payment. You can also opt for a maintenance package. This can include insurance, regular servicing, breakdown cover and other extras.
- The car isn’t yours
Your lender legally owns the car, unless you put up the balloon payment at the end. This means that you cannot sell or otherwise get rid of the car.
More importantly, your lender can take the car away if you miss any payments.
- There’s usually a mileage allowance (and, possibly, other costs)
Mileage affects a car’s value, so you’ll typically have to agree on a mileage allowance at the beginning of your contract. Unless you buy the car outright, you’ll pay a penalty if you exceed this allowance. You’ll also have to pay for any dents, scratches or other necessary repairs.
- Buying the car can be expensive
Personal contract purchases aren’t usually recommended if you want to own the car. While monthly payments are usually lower than in other types of car finance, if you want to own the car outright it will work out to be much more expensive overall. If you want to buy the car, a personal loan or a hire purchase contract might be a better option.