PCP (Personal Contract Purchase) An explanation

Pros: Lower monthly repayments when compared to a more traditional hire purchase agreement also PCP offers more flexibility with repayments

Cons: More traditional Hire purchase agreements are cheaper if you want to own the vehicle at the end of the term. PCP deals also impose financial penalties for higher than contracted mileage and a failure to up keep the vehicle as mandated.

PCP deals have gained popularity over recent years and most manufactures and dealerships in the UK offer them.

When taking out a PCP deal you pay a percentage of the vehicles price as a deposit and then follow this up with monthly instalments similar to a loan, how ever these monthly repayments are smaller than other vehicle purchase plans as at the end of your deal you pay a final balloon payment before taking ownership of the vehicle.

You don’t have to pay the balloon payment in your PCP deal though. Once you’ve completed all the monthly payments you’ll usually have paid off around a third of the cost of the car and you effectively have three options. The first is to hand over the final payment and take ownership of the vehicle, the second is to simply hand the car back and walk away and the third is to trade the car in and start a new deal on a new car.

Borrowers wont always pay the balloon payment at the end of their term. Usually by the time of the final payment they will have paid off around a third of the cost of the vehicle and then have three options

1 Hand over the final payment and they own the vehicle out right.
2 Take the vehicle back to the dealership and walk away.
3 Trade the vehicle in and start a new contract with a new vehicle.

PCP deals are similar to leasing a car but the the end of the term the option to own the car is available. The flexibility offered with PCP deals has roved popular over recent years with UK consumers.

When the PCP deal is being negotiated the dealer should give a “Guaranteed Minimum Future Value” for the vehicle . This is the amount the vehicle would be worth at the end of the PCP agreement. It gives consumers some protection if the vehicle unexpectedly drops in value. If the value of the vehicle increases this increase can be used as the deposit for the next PCP deal.

Manufactures push PCP deals to the public and keep the interest rates lower to make them more appealing, however buyers also need to be aware of mileage limits and the need to maintain the car in line if the manufactures service schedules so as not to incur further penalties.

If consumers wish to take ownership of the vehicle at the end of the deal then PCP could well prove to be more expensive than a hire purchase agreement but for people looking to hand back or trade in the vehicle it can be a great option.

There has been some controversy in the press lately regarding PCP claims and  PCP miss-selling we will keep you updated as mire information on these issues comes to light