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Personal Contract Purchase (PCP) is a type of car finance similar to Hire Purchase (HP), but with more flexibility. It's ideal if you want low monthly payments and the option to change your car regularly.
A staggering 80 per cent of all new and used cars sold on finance are bought in this way. It's also the preferred finance by dealers and car manufacturers.
Despite this being seen as the most complex financing option, when broken down it's fairly easy to understand.
Some manufacturers offer deposit contributions of between £500 - £2,000. However, these are generally only available when financing through the manufacturer's own finance arm.
To calculate your monthly repayments, the dealer will ask you to specify an annual mileage allowance i.e. 5,000 miles and also the length of the contract. They’ll then estimate how much the car is likely to be worth at the end of the agreement. This amount is referred to as the Guaranteed Minimum Future Value (GMFV).
This amount is deducted from the purchase price and what's left, minus any deposit, is the amount you’ll be financing.
The higher the mileage allowance the more quickly the car will depreciate, resulting in a lower GMFV and higher monthly payments. However, be realistic about how many miles you expect to cover as anything over will cost you between 4p and 14.9p per mile over the allowance.
As you’re paying for the depreciation value of the car and not to own it, payments are likely to be lower than with Hire Purchase or a motor loan.
Once your agreement ends, you have the flexibility to choose from one of three options.
1. Hand the car back and walk away – Simply return the car to the dealership and walk away with nothing to pay - subject to damage and additional mileage.
2. Trade the car in for a new one – Use any value above the GMFV amount as a deposit towards a new car. For example, if the GMFV is £6,000 and the car is worth £7,000 at the end of the contract, you’ll have £1,000 deposit to put towards your new car.
3. Pay the GMFV and own the car outright – Paying the GMFV activates a transfer of ownership and the car becomes yours. However, the cost will run into the thousands, so you may prefer to refinance the car.
Option: At the end of the agreement, if you don't want to keep the car, but it's worth considerably more than the GMFV, you can pay it off to gain ownership then sell to net a small profit. For example, if the GMFV is £6,000, but the car is worth £7,000 when sold, you would make £1,000 after paying off the rest of the finance.
New car every two–three years – PCP gives you the flexibility to switch to a new car more often than Hire Purchase.
Flexible ownership options – You can leave the decision on whether or not you want to own the car until the end of the agreement.
Low deposit options and deposit contributions – Generally, this option requires a deposit of just 10%, and some manufacturer-led deals are available with no deposit at all. In addition, manufacturers and ourselves often offer deposit contributions of between £500 and £2,000.
Low monthly payments – You’re not financing the full cost of the car so your payments are likely to be lower than with a Hire Purchase or motor loan.
No depreciation worries – You won't initially own the car so there's no need to worry about its future value.
Large GMFV payment required to own the car – Originally calculated by the dealer at the beginning of the agreement, this payment must be paid in full if you want to own the car.
Additional cost per mile for any overage – This can run from 4-14.9p per mile and can prove costly if you run even a few hundred miles over your pre-agreed allowance.
You will need a fairly good credit score – You’re only eligible for this option if you have a good credit score. If not, you’re more likely to get approved for Hire Purchase.
The car must be kept in good condition – At the end of the agreement you may have to pay for any damage considered to be over and above general wear and tear.
Does PCP require a credit check? – Yes. Before authorising you to drive away in a car worth thousands, the lender will need to be sure of who you are and that you’re likely to stick to the credit agreement.
Is the final payment for PCP finance mandatory? - No. The great thing about a Personal Contract Purchase agreement is that it's flexible. The option of ownership is available, but only if you want to own the car, do you need to pay the final payment.
Please see our PCP infographic for a quick-fire breakdown of how PCP finance works.
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.
Decidebloom Ltd t/a Stoneacre, Omega Boulevard, Capitol Park, Thorne, DN8 5TX, is authorised and regulated by the Financial Conduct Authority. Our FCA number is 308726. You can verify this by visiting the FCA website or by contacting the FCA on 0800 111 6768.
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