PCP finance: Your complete guide
A Personal Contract Purchase agreement — or PCP for short — is a popular way to finance car purchases but is it always the best option? Here's what you need to know.
- How do PCPs work?
- Who owns a car bought on a PCP?
- What happens at the end of a PCP?
Financing a car with a Personal Contract Purchase agreement, conveniently known as a PCP for short, is the most common buying method for new models.
While similar in principle to hire purchase (HP), the amount paid each month is smaller because instead of paying off the entire value of the car over the term of the agreement, the customer is only paying off its depreciation. In other words, financing the amount its value is expected to drop by.
Depreciation is usually the biggest cost associated with owning a new car. With a PCP, the customer gets the benefit of a new car without having to pay for the vehicle outright.
As the car will have an agreed minimum value at the end of the term, the servicing schedule must be maintained, plus there will be a penalty fee for exceeding the agreed mileage cap.
If you typically change your new car every few years, a PCP could likely be the most cost effective way of obtaining one. For those who tend to keep their vehicles for longer or cover high annual mileages, then HP could be the better option.
How do PCPs work?
When opting for a PCP deal, buyers will typically pay a deposit of 10% to 20% of the car's overall value, agreeing to pay monthly installments, usually over a three- to five-year period.
To calculate the amount each monthly repayment will cost, the dealer will provide a figure called the Guaranteed Minimum Future Value (GMFV), which is the minimum they expect the car to be worth at the end of the agreement.
So, if a car with a retail price of £30,000 has a GMFV of £15,000 after three years, the PCP deal will be to finance that £15,000 difference. If an alternative car has a GMFV of £10,000 over the same timescale, then it's £20,000 difference the PCP arrangement must cover
At the end of the arrangement, you can pay the GMFV figure with a balloon payment to own the car outright, take out a PCP on a new model or simply hand the car back and walk away.
How much does a PCP cost?
Just like the perennial 'how long's a piece of string?' query, there's no one-size-fits-all answer to how much PCPs cost due to the number of factors involved.
Size of the deposit. Typically, 10% to 20% of the car's retail price is usual, unless the finance package stipulates a minimum amount, but increasing the deposit size will lower the monthly payments. Occasionally for slower-selling models, 0% deposits are offered, but that could make the repayments eye-wideningly large.
Outside contribution. As a further incentive, dealers or the manufacturers themselves will contribute an amount to the deposit, too, further reducing your monthly bills.
Price and Guaranteed Minimum Future Value. While a more expensive car would ordinarily generate higher monthly bills than a modestly priced one, remember with a PCP is the difference between what it's worth now and what it will be valued at come the end of the agreement that you are financing. A pricier model with a lower rate of depreciation than a cheap and cheerful prospect with a rock bottom resale value will cost less each month.
Agreement length. As you'd expect, paying an amount of money back over a shorter period of time will make each instalment costlier than over a longer spell.
Interest rates. It's worth remembering that shorter agreements usually have lower rates than longer ones, so you might pay less overall if you can afford to pay the steeper instalments.
Can PCPs be ended early?
Although you can't simply walk away from the PCP deal before its conclusion but there are ways the agreement can be formally drawn to a close ahead of schedule.
Ending a PCP by voluntary termination
A legal right afforded to consumers by the Consumer Credit Act 1974, voluntary termination gives you the option to end a PCP agreement, providing you have already paid at least 50% of the total amount. If you haven't yet made sufficient payments, then you can opt to may the shortfall early in order to reach the required percentage.
Finance providers and dealerships aren’t keen on consumers using this method as it frequently means a loss for them, but provided you have fulfilled the required criteria then it is absolutely your right to do so. A voluntary termination does not damage your credit score either, although it is worth bearing in mind that if you apply for car finance in future already having used a voluntary termination may affect your acceptance.
The key criteria that must be fulfilled in order for you to return your car under a voluntary termination are:
- You must have repaid 50% of the total amount payable — this figure will be included on the paperwork when you took out the finance and includes the final balloon payment, interest and fees. It is not the halfway point of the agreement — because the balloon payment is large, the point at which you have paid 50% of the total amount payable tends to be nearer the end of a PCP deal.
- The vehicle is in good condition — any damage other than fair wear and tear will result in additional fees to rectify whatever is wrong.
What if my circumstances change and I can't afford the payments?
If you are struggling to meet your payments and voluntary termination is not an option, contact the finance company the PCP is organised with and explain your situation to them.
Financial institutions have a duty to assist you if you are in such difficulties and they may be able to rearrange the agreement or accept reduced payments for a period so you can get back on track.
It is far better to contact them to keep them informed and ask for their help than burying your head in the sand and missing payments. This will damage your credit rating which will have implications for years to come.
Can I pay off the whole deal early?
Yes, another option is to settle the agreement early.
Contact your finance company and ask for a settlement figure, which will be less than the total amount payable depending on where you are in the agreement as the amount of interest you pay is less. Remember, this will include the final balloon payment, not just the remaining monthly instalment of the PCP.
If you can pay the settlement figure the car then becomes yours, allowing you to sell it on immediately or keep it if you choose to do so.
What happens at the end of a PCP?
Before you get close to the end of your PCP agreement, its makes sense to decide which of your three options suits you best and make any necessary arrangements beforehand:
- Arranging a PCP on a new model
- Returning the car you had the PCP for
- Buying the car you had the PCP for
Arranging a PCP on a new car
If you enjoyed the experience and flexibility, you can arrange a new PCP deal on a box-fresh model in the same manner as before, potentially with a little extra financial help.
Remember the GMFV figure at the start of the deal? If it turns out that your car is worth more than that minimum figure, the difference is your equity, because essentially you've overpaid. As it's your money it's yours to do as you wish with, but it often makes sense to add it to the deposit on your new PCP to reduce the monthly instalments.
If your car is worth less than the GMFV, then relax — you don't have the pay the difference to make up the shortfall. That's essentially on the dealer or finance company for suggesting too high a GMFV figure in the first place.
While it will be expected that you will have maintained good order on the car you're returning, dealers tend to be a little more lenient over minor damage as you have taken out a new package with them. Similarly, providing it's not excessively over, most will overlook mileages that exceed the originally agreed cap.
Remember, you aren't tied to the dealer or car brand of your concluding PCP, either, as rival companies will equally be keen to obtain your business, so make sure to shop around.
Returning the car and walking away
If you have no desire to start a new PCP or buy the car you have had your existing arrangement for, then you can simply hand it back to the original dealer upon making your final payment and walk away.
Expect the car to be more thoroughly checked over, though, if this is your preferred option, with additional fees to pay for making reparations to the bodywork, wheels and interior. If you know something is going to be charged for that's outside the fair wear and tear guidelines, it could well be cheaper for you to pay this yourself in advance of handing the car back than paying the dealer's charges.
Similarly, if you've gone over the agreed mileage limit, expect to pay the penalty for that if you are handing the car back. Short of stopping driving it to make it worse, there is no legal way to reduce car's mileage.
Arguably the biggest downside is that even if you have got some positive equity with the car being worth more than its GMFV, by walking away you forfeit your right to it.
Buying the car outright
This is the most straightforward option at the end of a PCP, as you will make a final balloon payment equal to the GMFV established at the start of the deal. This balloon payment will be due 30 days after your last monthly instalment was paid.
The dealer will not be especially concerned about the car's condition or excessive mileage should you go ahead with the purchase.
While it's the simplest option, it's not necessarily the best one. If the car is worth less than the GMFV, then it would be wise to ponder on the sense of it. You took a PCP out in the first place to reduce your monthly costs, but now you're agreeing to buy it as a used car knowing it's already worth less than what it will cost you.
On the flipside, if it's worth significantly more than the agreed GMFV figure, while you're not entitled to any equity you have built up, once you own the car outright it is yours to do as you please with — including quickly selling it on at a tidy profit.
If you still want to go ahead and buy the car then simply make the final balloon payment and the car is yours, at this stage legal ownership transfers to you, so ensure you receive a receipt confirming the car has been paid for in full.
Should you not have the funds available in order to purchase the vehicle outright you could take out a loan for this amount, or your shortfall, so you can still purchase the car.
Do I need GAP insurance with a PCP?
If you're buying a car on PCP, chances are you will be offered GAP insurance at some point — but do you actually need it?
It's worthwhile knowing exactly what GAP insurance is because it might just work for you.
GAP insurance can be a useful service for new car buyers, ensuring that you’re not left out of pocket in the unfortunate event of an insurance write-off.
Will a credit check be done if I apply for a PCP?
Yes. Like a loan or credit card application, a PCP is a form of finance and requires a credit check. Your credit score will not only determine whether your application is successful but also the rate of interest you are offered.
The headline APR rates shown on adverts are representative and a best case scenario for those who have an excellent credit rating. If you have a lower credit rating, expect a higher rate of interest.
Who owns a car bought on a PCP?
Although the finance company rather than the customer legally owns the car, the V5C — also known as the log book — has the customer's name and address as the keeper of the vehicle. Remember, the V5C is not proof of ownership.
While some car buyers are put off by this distinction and shun PCPs as a result, it's worth noting that almost all cars are depreciating assets, with the greatest percentage devaluing occuring in the first year. By only financing that depreciation — plus interest, of course — the lower monthly instalments are more important to most car buyers than the ownership question.
Plus, a PCP doesn't prevent eventual ownership as a final balloon payment can be made to cover the GMFV at the end of the agreement.
