Buying a car with a Personal Contract Purchase (PCP) Agreement

This type of finance option is similar to a Hire Purchase agreement, but usually offers lower monthly payments. You have to bear in mind that the total amount of money you will pay back is often higher than the other finance options available.

How to PCP Agreements Work

Instead of getting a repayment loan for the full value of the car, you get a loan for the difference between the sale price and the predicted value at the end of the finance agreement.

This predicted value is called the Guaranteed Minimum Future Value (GMFV) and is based on several factors like the age of the car, it’s expected mileage and condition at the end of the finance agreement. The GMFV is also referred to as the “balloon payment”; the amount you can pay if you want to keep the car at the end of the agreement.

In addition to the repayment loan and the interest you are charged on that amount, you are also charged for interest payments on the GMFV amount that you do not repay during the term of the agreement.

At the end of the finance agreement, you can:

  • Return the car to the dealer, potentially paying any charges that you might have incurred (for example excess mileage or excessive wear and tear).
  • Use the resale value of the car towards buying a new car.
  • Pay the balloon payment to own the car. If you haven’t got this money saved, you might need to take out another loan to pay it off.

Pros of PCP Agreements

  • Car dealerships generally incentivise their HP and PCP offerings with deposit contributions or preferential interest rates
  • Lower monthly payments when compared to HP agreements
  • Flexible repayment terms (usually ranging from 12 to 60 months)
  • You can get the car sooner without having to save up first
  • You have a choice of what to do at the end of the repayment term
  • PCP is generally better if you don’t want to keep your car at the end of the agreement

Cons of PCP Agreements

  • You don’t own the car unless you settle the finance and pay the balloon payment
  • Your credit score might affect which offers you are entitled to
  • Exceeding the contracted mileage will usually result in additional charges
  • Excessive wear and tear, damage such as dints or scratches can mean you pay extra fees to rectify these issues
  • The total amount you pay might be more than other finance options available
  • If you plan an taking your car abroad; some PCP contracts impose limits on the number of days your car can be out of the country and you might need to request permission before you do
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