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PCP (Personal Contract Purchase) in brief

  • Variation of a Hire Purchase agreement
  • Regular monthly payments towards the purchase of a new vehicle are a benefit
  • As are lower monthly payments and greater flexibility
  • Protection from falls in car values

THAT tetchy subject of car finance has been back in the spotlight recently. You’ve probably seen it in the media, spelling out possible negative equity in car deals, questions of affordability, too pushy car salesmen and the like, all underpinned by a forthcoming Financial Conduct Authority (FCA) investigation into motor finance.

But what’s the truth behind some of these rather hysterical headlines? Is PCP really the bad boy of car finance? Will it leave you plunged into remorseless car negative equity, saddled with a motor you can’t possibly get shot of?

Err… not really.

In our eyes there are two issues in play here, that are linked but are still separate. Firstly, there’s a question of affordability for the consumer; the second is the exposure of finance companies to potential losses in the residual value of cars.

The resulting commentary in the media has sometimes exposed confusion over what Personal Contract Purchase (PCP) and Personal Contract Hire (PCH) provide consumers, as well as confusing the terminology to describe each product.

So to solve that confusion here’s the definitive definition of a PCP.

A PCP offers the benefits of regular monthly payments towards the purchase of a new vehicle – rather like an HP agreement – but unlike HP affords lower monthly payments and provides greater flexibility for the consumer.

The key difference is that the car’s value at the end of the PCP term is worked out at the start of the agreement. This value is then deferred until the contract comes to an end. Essentially you are covering the finance and the depreciation (loss in value) on the car, rather than the total amount of the car’s worth (as in traditional HP).

This deferred amount is usually referred to as the Guaranteed Minimum Future Value (GMFV) and is based on the length of the contract and how many miles the car will have travelled by the end of the agreement.

This future value of the car is guaranteed by the lender so you don’t have to worry about car residual values plummeting.

A PCP also provides a great amount of flexibility at the end of the plan. These are the three options:

  • You can decide whether you would like to own the car outright by paying the deferred value (GMFV) – often referred to as a ‘balloon’;
  • You can use any equity in the car above the GMFV as a down payment on another new car PCP agreement;
  • Or you can return the car to the lender and, subject to meeting certain terms about the appearance of the car and any mileage that is in excess of the agreement, there is nothing else to pay.

What are the benefits of PCP car finance?

This degree of flexibility with a PCP is a real plus point, along with the lack of exposure to risk on the consumer’s part. If, for example, the car is worth less than the GMFV then the consumer can hand the car back, and that hot potato – the loss in value of the car – is tossed into the finance company’s lap.

There is even the possibility, should you wish or require it, to end the agreement before the term is up with a Voluntary Termination (VT). You can do a VT as long as more than half the total repayment value has been completed.

One thing that is worth noting is that the monthly payments are not lease payments. Lease rentals apply to a Personal Contract Hire (PCH) agreement.

And should the GMFV be settled by the consumer, title to the car (legal ownership) will transfer in its entirety. Under a lease agreement, you do not take title to the vehicle.

A PCP is a conditional sale agreement and the consumer is protected under the Consumer Credit Act of 1974 as well as being a regulated product under the Financial Conduct Authority.

Are there any downsides to PCP car finance?

There are some drawbacks to PCP agreements that should be noted.

You may find the different choices at the end of the agreement worrying or perplexing; it’s important to maintain the vehicle service history and the condition of the car is essential as charges are levied for damage on the car should it be returned at the end of the agreement. There may also be excess mileage payments to meet.

But these drawbacks aside, PCP is a very good car finance product that is currently under fire mostly for issues not about the product, but perhaps about how the product is sold to car buyers.

But with the understanding explained in this feature, you should know exactly what you are getting into with a PCP car finance agreement.

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