What is a Personal Contract Purchase (PCP) arrangement
A personal contract purchase (PCP) is very similar to a hire purchase because of your ownership of a car is delayed until the end of the agreement. After an initial deposit is made fixed monthly installments are required. At the end of the agreed term, you can either make a larger final (balloon) payment to purchase the car outright or you can hand it back to the dealership and take out another contract for another car. This decision will depend on how much the car is predicted to be worth when the contract expires. This will depend on how many miles you’ll be doing or how much the dealer predicts the car will lose in value. If there’s not much value left, you might need to pay another deposit in order to swap for a new car. PCP deals tend to have lower monthly repayments than with a high purchase. It is also worth knowing that some lenders will offer PCP finance for up to £200,000 over a 5 year term.
What are the benefits of a PCP contract?
You have the option to change your car every 2-3 years
You have lower monthly repayments
You can get equity back if you take good care of the vehicle and decide not to purchase at the end of your contract
You have the option to own the vehicle at the end of the agreement
You can access cars that may not have otherwise been affordable with other finance options
PCP deals that are tailored to your specific financial situation
Bad credit customers and customers with CCJ’s considered
So how does PCP work
Firstly, a guaranteed future value (GFV) of the vehicle is estimated (as well as estimated mileage), which is simply what the vehicle will be worth at the end of the contract. The reason for this is because, unlike hire purchase where you borrow the full amount of the cars worth, you’ll only borrow and repay the difference between what the car is worth now and what it will be at the end of your car finance agreement.
This is referred to as, depreciation. This is great for those who wish to pay a lower amount each month but it does mean that you will need to pay a balloon payment at the end of the contract in order to become the legal owner.
If you prefer not to become the owner, you can either hand it back to the lender or part exchange it for another vehicle, which is what makes personal contract purchase ideal for people who prefer to change cars every 2-3 years.
You won’t have to worry about selling it on later and if the car is worth more than the original estimated guaranteed future value, you can use that equity towards your next car. With this in mind, the opposite also applies. If the car is returned in poor condition or far exceeds the estimated mileage, you may be required to pay an additional fee.
Settling your PCP contract early
You can usually settle your personal contract purchase contract early but you may be required to pay off the difference between the current value of the car and the outstanding balance that you owe, otherwise known as ‘negative equity’. For example, if your car is worth £15,000 now but your settlement figure is £18,000, you’ll still need to pay £3,000. Early repayment charges will be outlined in the agreement and should be discussed before you agree to take out PCP for any vehicle. To find out more, get in touch with us today or hit ‘apply’ to see what options are available.
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