What is Personal Contract Purchase (PCP)
When you buy a new or used car on personal contract purchase, sometimes also referred to a personal contact plan, the car is leased from a finance company over a fixed term and you then have the option to return or purchase the car at the end of this contract. So you pay a monthly amount for the duration of the PCP contract term and then a final purchase amount should you want to buy the car
You specify
- Term - the term of the PCP contract is up to you although usually will be in 6 or 12 monthly increments.
- Annual mileage – you have to provide an estimate of the annual mileage you expect to cover for each year of the PCP contract term.
- Deposit – as with any finance agreement, you can pay an initial deposit in order to reduce the amount to be financed. Most finance providers will specify a minimum and maximum deposit amount that must be paid.
- Maintenance – whether you want servicing, road tax etc to be included in the contract.
How it works
As with a standard loan, the finance provider will decide upon the interest rate they are going to offer based on the term, deposit and amount to be financed amongst other factors.
They will then project the guaranteed future value of the car. This projection takes into account the age of the car at the end of the fixed PCP contract, the annual mileage you estimate at the time of quotation and the projected market value.
Your quotation is then calculated and you pay a fixed monthly amount for the duration of the PCP contract term, although there maybe fees added to the initial and final monthly payments.
At the end of the PCP contract, you have the option to purchase the car from the finance company by making a lump sum payment equivalent to the projected future value. In addition to this you would also be charged for any additional mileage over and above your initial mileage estimation. You do not have to purchase the car at the end of the PCP contract however and can choose to return the car to the supplier and walk away or use the difference between the guaranteed future value (GFV) and the actual car value as a deposit on your next car. In the latter case, the value of the car is recalculated taking into account the actual mileage (an additional mileage charge will be outlined in the initial quotation) and the cars condition. Any difference between this actual value and the future value calculated at the start of the contract can be used as a deposit on your next car.
Extras
A PCP agreement can include servicing and maintenance throughout the term of the contract.
The Benefits
Personal contract purchase (PCP) is becoming ever more popular as a method of buying a car. You pay fixed monthy payments and the purchase cost at the end of the PCP contract term is guaranteed – i.e. there will not be any suprises or change in costs due to adverse market conditions and you cannot therefore suffer from negative equity. Your monthly payments are lower than other finance options and the total amount that you pay over the course of the term (including the optional purchase amount) is generally lower than you would on Hire Purchase for instance.
Road tax is included for the first year and all servicing and road tax can be incorporated into the contract if you choose to include maintenance.
Regulation
A personal contract purchase plan is classed as a conditional sale agreement that offers you protection under the Consumer Credit Act 1974 and the Financial Services Regulations 2004.