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PCH Car Deals
What is PCP Car Finance? PCP Explained
PCP meaning
If you’re looking to finance a car, there’s a high chance that Personal Contract Purchase, also known as PCP will be on the agenda.
Similar to Hire Purchase (HP), a PCP deal allows you pay for a new or used car over several monthly payments. It also offers much more flexibility as a whole and is generally a more popular choice.
There are a few components to the best PCP deal and how it works may seem complicated at first; however, when broken down, it can be fairly easy to understand - let’s get started.
PCP car finance is a flexible method of paying for a car over a few months/years. There are direct similarities to HP finance:
- Typically a deposit is paid at the start of the contract (though not always necessary).
- This is then followed by an agreed number of monthly payments.
There are also a couple of extra factors to a PCP deal over and above HP, especially when the agreement comes to the end.
End of contract options
There are three core choices available to you come the end of a PCP deal:
- Make the car yours
If you want to own the car at the end of the agreement, you can pay of the GMFV in full to immediately make that so. In addition, if you don't have the total sum to hand, then you can refinance the amount and pay it off until full ownership is complete.
- Part exchange for a new car
This is a solid and useful option when the car is worth more than the GMFV come the end of the contract. The dealer will pay off the GMFV on your behalf, and the value over and above this goes towards your next car.
For example, if the car’s GMFV is £8,000 but it’s worth £9,000 at the end of the contract, you’ll have £1,000 of equity towards your next vehicle.
Whether or not there is equity in the car will depend mostly on the vehicle’s mileage when handing it back and whether it’s under the limit agreed at the start of the contract. The car’s condition will also affect its valuation at this point.
- Hand the car back
Where the GMFV also helps is when the car is worth less than this payment come the end of the agreement. While this means you don't have any equity towards a new car, it also acts as a safety net and you won't have to pay out the difference.
Is it better to buy a car with cash or get PCP finance?
This depends on your circumstances – if you’re buying a car with cash only and then want to change the car after three years, it will be more expensive. In that case, it’s better to take out a PCP deal rather than buying outright. However, paying cash could be better if you’re after a used car where depreciation is reduced when compared to a new car.
PCP Pros and Cons
For some, PCP deals work perfectly to their flexible lifestyle, but others prefer something a little more straightforward.
- Pros
PCP deals are popular due to the following advantages:
New car every two-three years – PCP deals give you the flexibility to switch cars much more often than Hire Purchase
Flexible ownership possibilities – multiple options available at the end of the contract
Lower monthly payments – the GMFV allows for typically lower payments than Hire Purchase
Deposit contributions – manufacturers and dealerships are able to offer contributions towards your initial deposit on plenty of PCP deals
Depreciation less of a worry – as you don’t initially own the car, the vehicle’s value isn’t an immediate concern
- Cons
For some, Personal Contract Purchase has its disadvantages:
Final payment to own the car costly – the GMFV will be a large sum and needs to be paid to own the car, though can be refinanced
Additional mileage costs – extra charges may apply if you go over your mileage limit
Good credit score required – typically, a decent credit score is needed to get accepted for PCP finance
Damage to vehicle a consideration – if handing the car back at the end, you’ll likely have to pay for any damage caused during your time with it
Used Car PCP Deals
PCP car finance has been largely popular due to affordability of brand new cars when compared to an HP deal that’s more expensive.
However, that doesn’t mean that used cars miss out on the advent of this finance type.
PCP on used cars is still widely available, and you can even pair it up with other car finance deals, such as 0% and no deposit options.
Things to look out for when purchasing a used car on PCP finance
Keep in mind that typically you won’t get quite as much assistance on the deposit. While contributions from manufacturers and dealers are popular on new cars, used cars don’t tend to benefit from the same availability, so you may have to fork out more of your own money at this stage on a used vehicle.
PCP Criteria for Used Cars
Age of the used car
It will depend on how old the car is as to whether you can finance it through a PCP deal, so ask ahead of time if you’re after this finance package.
Contract length
Given the age of a used car, the contract might be brought down from five to a maximum of three. The shorter the contract, the higher the monthly payments cost.
Cost of a used car
A car’s cost can also rule it out of having PCP available if its value is too low to accommodate this finance type.
PCP Factors
Mileage
Your monthly payments are affected by how many miles you’ve done during the contract - the higher the miles the larger the payment and vice-versa.
Stick to the mileage limit - if you go over this limit, there will be a charge at the end of the contract for every mile over.
Guaranteed Minimum Future Value (GMFV)
You may have noticed that PCP payments tend to be noticeably cheaper than those on an HP deal. That’s because a large amount of the car’s value in a PCP finance deal is wrapped up in what’s called the GMFV - or Guaranteed Minimum Future Value. It acts as an optional final balloon payment when the contract comes to an end, making the car yours if you choose to pay it.
Example PCP Finance Quote
Cash Price: £15,017; Total Deposit: £2,249; Amount to Finance: £12,768; Monthly Payment: £179.99; GMFV: £6,547.50; Interest Payable: £2,429.02; Total Amount Payable: £17,446.02; Annual Mileage: 5,000 (20,000 contract limit); Excess Mileage Charge: 3.6ppm; Duration of Agreement: 49 Months; Number of Monthly Payments: 48; APR: 6.3%; Fixed Rate: 6.24%
You will likely find on many PCP deals offered by manufacturers on new cars a Manufacturer Deposit Contribution – this goes towards the total deposit for the vehicle on top of your own. For example, in the quote above, the Total Deposit is made up of a £1,750 Manufacturer Contribution and a £499 Customer Deposit.
The mileage, as you can see, is given on an annual basis. In this example, this is set at 5,000 miles a year over a four-year period, equating to a total 20,000-mile limit. This doesn’t mean you have to do 5,000 per year, it’s more that it gives you a 20,000 limit for the contract as a whole.
Finance Disclosure
For the purpose of this promotion Stoneacre is not acting as a lender but as an independent credit broker working with a panel of lenders. A list of these lenders is available upon request. Stoneacre do not charge a fee for an introduction to a finance provider, however, we may or may not receive a commission.
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