A Personal Contract Purchase (PCP) is a flexible and popular vehicle finance option, offering lower monthly payments compared to other methods, such as Hire Purchase. This type of agreement allows you to defer a significant portion of the vehicle's cost until the end of the contract, making it a convenient choice for many drivers.
PCP is an excellent choice for those who enjoy driving new cars every few years or want the flexibility to decide on ownership at the end of the agreement. Be sure to carefully review the terms and choose a repayment plan that aligns with your budget and driving habits.
PCP is a loan secured against the vehicle, but unlike other finance agreements, the repayments are calculated based on a portion of the vehicle's value rather than its full price. The finance company guarantees a minimum value for the vehicle at the end of the agreement, known as the Guaranteed Minimum Future Value (GMFV) or Optional Final Payment (OFP). This means you only repay the difference between the car's initial price and the GMFV, plus any interest.
PCP agreements typically last from 2 to 4 years. Several factors determine the repayment amounts, including:
If it is worth less than the GMFV, you can return the car and walk away (subject to mileage and condition).
You can pay the GMFV (plus any Option to Purchase fee) and keep the vehicle. You will become the legal owner of the vehicle.
If the part-exchange value is greater than the GMFV, it can be used as a deposit for your next vehicle finance agreement or as "cash-back." You could also sell the vehicle privately once legal title is gained and settle the GMFV.
PCP agreements usually include a mileage cap. Exceeding this limit may result in additional charges at the end of the agreement.
The vehicle must be returned in good condition, as defined in your agreement. Excessive wear and tear could lead to extra costs.
You only own the car if you make the GMFV payment at the end. Until then, the finance company retains ownership.
You can relax about the car's future trade-in or resale value because the lender ensures that your car will have a guaranteed minimum value at the end of the agreement.
The arrangement is very flexible, offering various options at the end, including the possibility to purchase the car if you wish.
It's worth noting that most cars included in PCP deals are covered by the manufacturer's warranty (although it may expire before the contract ends), as PCP deals are typically available for new or nearly-new cars.
Ownership of the car only occurs at the conclusion of the contract if you settle the Guaranteed Minimum Future Value (GMFV) or Optional Final Payment (OFP).
If the anticipated GMFV/OFP is closely aligned with the actual car value, you may have minimal equity to transfer to another deal.
Additionally, exceeding the agreed-upon mileage may result in extra charges, typically ranging from 6 to 20 pence per mile.
The Guaranteed Minimum Future Value is based on keeping the car in a good condition. You will be charged extra to put right anything that’s not down to normal wear and tear.
