PCP – Personal Contract Purchase Explained

There has been a huge surge in the popularity of PCP packages in recent years.

And it is easy to see why. They are flexible, quick and easy to arrange and can be a relatively cheap way to buy a car.

Entering into a PCP arrangement means you are virtually guaranteed as good deal, as well as making an array of makes and models more affordable.

But how does it work?

PCP car finance deals are widely available from manufacturers, franchises and independent dealers. They may be straightforward and a cheaper option than some other options. Little wonder then, that they have become so popular.

How does it work?

You’ll pay a deposit and monthly instalments, just as you would with a loan. The monthly repayments are often much smaller than with other methods of finance. This is because at the end of a PCP term (the length of the agreement) a final sum or ‘balloon payment’ needs to be paid. It’s only after this payment is made that the car become yours. 

What if I want to change my car?

One of the most attractive things about taking the PCP option is its flexibility.

Once you reached the end of the agreed term you will generally have paid off around a third of the cost of the car.

At this point, you have three options:

  1. Make the final payment and take ownership of the vehicle.
  2. Do not make the balloon payment. Simply hand the car back and walk away.
  3. Trade the car in and start a new deal on another car.

Financing the cost of a new car with a PCP deal is much like leasing a car, but with an option to own it outright at the end. 

Does the depreciation of a vehicle’s value affect a PCP deal?

Buying with a PCP agreement means you will receive a Guaranteed Minimum Future Value (GMFV) figure. This is the minimum amount the car will be worth when it comes to making your balloon payment.

Should the car’s value unexpectedly drop sharply during your term you will be protected and receive the GMFV. And if the car is worth more than when you bought it you can use the equity as a deposit when arranging another PCP deal.

Is PCP car finance the best move for me?

If you’re looking to save some money, it could be the ideal option. Interest rates are usually low so there are bargains to be had. On the other hand, you don’t own the car until the final balance is paid at the end of the agreed term.

One other important factor to consider is the mileage limits that often come into play.

You will need to provide an estimate of your annual mileage when you take out the deal, as this will affect the GMFV.

There is usually a charge applied if you exceed these limits, so it’s worth doing your calculations correctly and giving an accurate number.

On a PCP deal, you also need to maintain the car in accordance with the manufacturer’s service schedule and look after it well. It must be in a good condition when you hand it back.

Remember, if you are likely to want to take ownership of the car at the end of the term, PCP might prove more expensive than financing your new vehicle with a hire purchase deal.

But, if you want to hand the car back or trade it in for a new model, as most PCP customers do, it can be a fantastic low-cost method.

So, if you can accurately predict your annual mileage, plan to look after your car and will probably want a new one at the end of the term, then PCP could be the ideal option.  

The current state of play

Millions of cars are bought using finance each year in the UK. And in a 2018 survey by CarGurus, nine out of 10 people with existing finance arrangements admitted they did not know what was in the small print of their contracts.

Worryingly, 53% who used PCP to buy their vehicles didn’t know what it stood for and 47% didn’t know how much money they have borrowed.

Most of the details that dealers would rather you didn’t find are buried amid complex terms and jargon, which leads to a lack of transparency.

You may feel you have been mis-sold PCP car finance, and this could be the case if:

  • You borrowed more money than was necessary.
  • You weren’t given enough information about other options, such as hire purchase.
  • You felt pressured into accepting a PCP agreement.
  • The commission on your sale wasn’t revealed to you.
  • You were sold a mileage estimation that was too low.
  • They didn’t make it clear who owned the car.
  • You weren’t told who is financially responsible for any repairs.
  • It wasn’t explained that you wouldn’t automatically own the car outright after the term.

If you feel you have a case to make a claim for compensation but would like advice from the experts, contact Barings Law.

We have a team of solicitors ready to fight your corner and claim back the compensation you deserve. We look forward to representing you on a No-Win, No-Fee basis.

For a free, no-obligation webchat with our friendly, professional team, visit baringslaw.com or call us on 0161 200 9960.