July 23, 2024 11:53 AM
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Everything You Need to Know about PCP Car Deals

pcp car deals

Dealers calculate a forecast of what your car will be worth at the end of the agreement, called a Guaranteed Minimum Future Value (GMFV). If it’s worth more, you can use that ‘equity’ towards another new vehicle.

PCP is often cheaper than HP or a loan. However, you must adhere to stipulations such as mileage limits and manufacturers’ deposit contributions.

What is a PCP?

A PCP (Personal Contract Purchase) is a type of car finance that allows you to borrow money against the expected value of a vehicle at the end of its term rather than against its purchase price. This is often used to help you get into a more expensive car that may not be affordable if paid in cash. PCP car deals typically have lower monthly payments than other finance methods, such as hire purchase (HP) and personal loans.

You start a PCP by paying a deposit, which can be cash or the value of a trade-in vehicle. You then make repayments each month, plus interest on the financed amount, with an optional final ‘balloon’ payment at the end. This means you can spread the cost of the car and the deposit over a more extended period than with an HP agreement.

Suppose you change your mind or can’t afford to complete the PCP term. In that case, you can cancel or end it early by returning the car if you have paid back at least half its total value. This is known as the ‘half rule’. If you do this, the finance company will try to reach a settlement figure with you that you can manage, such as extending your contract or accepting a reduced payment. It will likely ask that the car is in good condition, too, so it won’t be charged for any damage or excessive wear and tear.

At the end of your PCP contract, you have three options: You can buy the car for its Guaranteed Minimum Future Value, which is typically much less than what the vehicle will be worth at the end of its life. You can also opt to pay a smaller final payment and leave the car with no outstanding balance, or you can simply pay the full balloon payment and own the car outright.

Manufacturers are keen to encourage people to take up PCPs, and they will sometimes contribute a deposit. It’s essential to check the small print of a contract before you sign, though, as there can be charges for exceeding agreed mileage limits and repairs or servicing that authorised service centres don’t do. Unlike other types of car finance, PCPs don’t generally include insurance, so you must arrange this separately.

How do PCP car deals work?

Personal contract purchase is a flexible car financing option offering lower monthly payments than a personal loan or hire purchase (HP) car finance agreement. They are also able to refer you for specialist care if necessary. Typically, you will see your PCP for routine health care and can expect to build a long-term relationship with them. This can benefit you because your PCP will become familiar with your health and lifestyle, allowing them to identify potential issues better before they develop.

Many people choose to finance their new car with a Personal Contract Purchase (PCP) agreement. This type of financing involves taking a deposit and paying monthly instalments. The amount you pay will depend on what the finance company predicts the car will be worth when your contract ends – known as the Guaranteed Minimum Future Value (GMFV) or Residual Value (RV). They take into account things like the model, expected mileage and age of the vehicle.

When you choose a car for PCP, it’s crucial to read the terms and conditions carefully. You’ll want to ensure you understand the amount of money you must pay back, including interest, before you sign up. You’ll also need to check the car’s agreed mileage limit and what extra charges may apply if you exceed it.

Another thing to consider is whether a PCP will work for you if you plan to upgrade or switch your car often. Typically, the deposit you pay with a PCP is higher than a traditional personal loan or hire purchase agreement, so it’s a good idea to consider your options before you commit to a PCP contract.

If you plan on buying the car at the end of your PCP contract, you must pay a lump sum called a ‘balloon payment’ to purchase it. You can use this cash to buy the car outright or hand it back and choose a different finance agreement for your next car. If the car is worth more than the outstanding finance, you can use that ‘equity’ as a deposit on a new PCP.

What are the benefits of a PCP?

There are many benefits of choosing a PCP over other car finance methods, such as hire purchase (HP) or a loan. One key benefit is that you can access cars you wouldn’t be able to afford with other types of financing. This is because a PCP takes the expected residual value of the car – also known as the guaranteed minimum future value – and removes it from the amount you’re borrowing, meaning that you only have to pay for the remainder of the price of the vehicle.

Another benefit of a PCP is that your monthly repayments are typically lower than other car finance methods. This is because the company providing your finance – usually the manufacturer or an independent financial provider – will have worked out how much the car is likely to be worth in three years – also known as the guaranteed minimum future valuation – and they will have taken this off the price of the car, which means that you’re only borrowing – and therefore paying interest on – the amount that remains.

A final benefit of a PCP is that you can hand your car back at the end of the contract, as long as it’s in good condition and hasn’t exceeded the agreed mileage limit. However, there may be charges for excessive wear and tear and damage, so always check the fine print carefully.

In addition, you can also choose to pay the final ‘balloon payment’ at the end of the contract to take ownership of the car – but again, this will come with extra charges for excess mileage and excessive damage. Of course, if you decide to buy the car, you must fully settle your finance agreement.

Of course, a final benefit of a PCP is that it’s flexible and easy to change if you want to. In most cases, you can swap your PCP for a newer model or even a different make of car if you want to, and this will be subject to the same restrictions as other forms of car finance – including an agreed mileage limit and the cost per mile if you exceed it.

What are the disadvantages of a PCP?

PCP is an attractive finance option for people who want to drive a new car but do not have the funds to buy one outright. However, it is vital to be aware of the disadvantages of a PCP before deciding to take this kind of finance.

The main disadvantage of a personal contract purchase is that you do not legally own the vehicle at the end of the agreement. This means that the car remains the legal property of the finance company, and it could be repossessed at any time if you do not keep up with your repayments. This is not the case with other types of car finance, such as a personal loan, where you own the vehicle the moment the money is transferred to the seller.

Another disadvantage of a PCP is that it can cost you more than other types of car financing in the long run. This is because you are paying off the forecast value of the car minus the deposit rather than just the interest. Depending on your budget, this might mean you have to pay more than if you took out a standard car loan or other financing agreement.

In addition, a PCP usually comes with a mileage limit, which you will need to stay within, or you might be charged for exceeding it. If you do go over the limit, you may also have to pay a ‘depreciation fee’ to compensate the finance company for the vehicle’s loss in value.

Finally, a PCP is unsuitable for people planning on selling their car or trading it in for another at the end of the contract. This is because the vehicle will be worth less than if you bought it outright, and therefore, it might not be worthwhile for you to sell it for a reasonable price.

The main benefit of PCP car deals is their flexibility and the ability to choose the kind of depreciation limit you want. The way this is set up makes it a fantastic finance option for anyone who wants to upgrade their vehicle regularly without worrying about the cost of reselling or trading in. It is also ideal for people who are unlikely to stick with the same car for over a few years, as it allows them to avoid making large lump sum payments over a more extended period.

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