Personal Contract Purchase (PCP)
PCP is one of the most popular finance agreement for consumers wishing to change their car between 2 and 4 years. So if you like to change your car regularly, but want low monthly payments to fit your budget, personal contract purchase could well be the answer. Don’t let the jargon put you off, this flexible deal could save you a lot of hassle!
Similar to an HP agreement, PCP consists of paying an initial deposit, followed by monthly payments. However, PCP differs from HP as the monthly payments only pay for the depreciation of the car, whereas with HP the monthly payment pays towards the ownership of the car.
For personal vehicles only, PCP is similar to a Personal Contract Hire (PCH) but also gives you the option to purchase the vehicle. When negotiating a PCP deal the finance company will set a Guaranteed Minimum Future Value (GMFV) for the car which will be calculated based on the age and mileage at the end of the contract. This is how much your car is expected to be worth after your finance deal ends. You will know this amount in advance, however it is an optional payment so don't be put off by the amount.
The GMFV also known as a Balloon payment will offer several options at the end:
- Hand the car back and walk away – as you would with a PCH.
- Pay the balloon in full or refinance it to own the vehicle.
If the car is worth more than the Balloon payment you can use this equity as a deposit for your new car. If the car is worth less than the Balloon payment, you don’t need to worry as the GMFV was set at the start of the contract therefore the finance company take the loss.