A Guide To Personal Contract Purchase Finance

Personal Contract PurchaseA PCP, a lease purchase classified as a conditional sale agreement, provides motorists with contracts at low fixed monthly payments for a period of two to three years.

The Consumer Credit Act 1974 governs conditional sales, including PCPs. The Act authorizes that drivers receive a car’s Minimum Guaranteed Future Value (MGFV), also called Guaranteed Future Value (GFV) upfront. Therefore, you know the guaranteed minimum price of your vehicle before your contract ends.

What motorists choose a PCP?

Motorists who:

  • Possess a steady and stable job.
  • Want to lease a vehicle instead of owning one.
  • Maintain a budget and want low fixed monthly payments.
  • Avoid high depreciation, the difference between the value of your car when you buy and sell the vehicle. A PCP helps you avoid the “depreciation trap” because fixed payments promote your ability to save for your next purchase because you know the MGFV.
  • Want to discontinue using a company car scheme. You use your company car allowance to fund your monthly payments without paying a company car tax.

How do providers determine monthly payments?

Providers factor in:

  • Vehicle cost
  • Your deposit – either in cash or a trade-in
  • Contract length
  • Planned mileage
  • The car’s GFV
  • Your Annual Percentage Rate (APR)
  • Your chosen maintenance requirements

What are the benefits of choosing a PCP?

  • Driving a more expensive vehicle because leasing, instead of buying, lowers monthly payments. Leasing also means you are not responsible for selling your car prior to choosing a new one.
  • Paying fixed monthly payments that are usually priced lower than other payment options.
  • Lowering your negative equity risk because of fixed payments and knowing the MGFV upfront.
  • Having your Road Tax, an annual excise tax that allows motorists to drive or park on public roads, covered for one year. You may buy additional coverage for your remaining contract years.
  • Having servicing costs included in your monthly payments. You only pay insurance and fuel costs. You may add extra maintenance coverage to fit your needs.

Are there risks to choosing a PCP?

  • You need to accurately determine mileage. You are responsible for paying any additional mileage not included in your plan.
  • A lower down payment might increase monthly payments, but those payments remain at the determined fixed rates.
  • Your provider will penalise for any unusual wear or damage to the vehicle.
  • Market downturns and unemployment sometimes result in drivers spending more on a PCP. Redundancy insurance, unemployment insurance that covers a percent of your income if your job becomes unnecessary, is available. However, redundancy insurance is expensive and you may spend more than the overall finance cost.

What happens when my agreement ends?

PCP offers motorists flexible options at the end of the 24-42 month period. You may:

  • Pay the MGFV and purchase the vehicle. You may also exchange vehicle parts.
  • Return the car to the provider – minus any paid deposit.
  • Choose another PCP.
  • Use the difference between the car’s retail value and the MGFV as a deposit towards a new car. If your MGFV is higher then when you purchased your plan, you pocket the difference. If the car’s value is lower, you do not pay that difference.

How do I find the best deal?

  • Conduct research to find a provider who will match your specifications.
  • Search websites to find online deals. In addition, many websites offer features where you compare and build your own quotes.
  • Analyze the cost and depreciation rate of your wanted car. Choosing a car with a lower depreciation rate will help you receive a better deal, or more cash in your pocket, when your contract ends.
  • Understand the terms of your APR. While you may pay a lower monthly payment, you could pay a higher deposit. You should calculate the different scenarios and compare them with your budget and monthly expenses.
  • Educate yourself regarding popular cars because manufactures over produce popular makes and models. When this occurs, dealers have too much inventory. This surplus means you receive a competitive plan.