Everything you need to know about PCP Car Loans
With several different car finance options available, choosing the right type of loan for you can often seem like a minefield. We’ve broken down all the key points on one of the most popular types of car loan, Personal Contract Purchase (PCP) so that you can make an informed decision as to whether this is the right type option for you.
What are PCP Car loans?Similar to hire purchase agreements, PCP loans mean that the borrower will not own the vehicle until the end of the agreement. An initial deposit is made, usually around 10% of the car’s value, following by fixed monthly instalments as laid out in the agreement. Once the agreed contract term is over, the borrower may either choose to make a final outright payment to purchase the car (balloon payment) or can hand it back to the dealer and then take out another contract on a different car. Whether you decide to make a balloon payment or hand the vehicle back will depend on the predicted value of the car once your contract is over. If it’s not worth much at the end of the contract, you can pay another deposit and then swap it in for a newer model.
So, in a nutshellIt might seem a little complex but PCP car loans can be understood easily by breaking it down into three key parts:
- Deposit – Those offering PCPs will normally ask for 10% of the car’s value as an initial deposit.
- Amount borrowed – The car finance provider will predict how much value the car will lose during the contract term and then decide on a loan amount based on this. A contract term is normally 24 months or 36 months
- Balloon payment – This is the remaining balance that will be paid if you wish to purchase the car at the end of the contract. It is sometimes called the Guaranteed Future Value (GFV) and dealers work it out by predicting the car’s value after depreciation, once the contract is over. The balloon payment is agreed at the beginning of the loan deal. You can choose whether you want to pay this to own the car at the end or start a new contract on a new car.
What happens when the contract is over?There are three options to choose from when your contract has come to an end. You can:
- Purchase the car with the balloon payment and you will become its proud owner.
- Hand it back with nothing else to pay, unless there is damage beyond normal wear and tear, or you have exceeded the agreed mileage limit (you’ll usually get charged between 7-10p for each mile you exceed), in which case you’ll probably have to pay some surplus fees.
- Take out another PCP contract and get a new car. It is common for the car to be worth a little bit more than the balloon payment once the PCP deal has ended, in which case, many dealers will allow you to use the remaining equity as a deposit for the new loan contract on the new car.