Cheap PCP Deals
What is a PCP & is it right for me?
A PCP, or personal contract purchase, is a way of financing a new car.
With monthly payments, it is similar in principle to hire purchase, but the amount paid each month is smaller. This is because instead of paying off the entire value of the car over the term of the agreement, the customer is only paying off the depreciation.
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 value at the end of the term, the servicing schedule must be maintained, and there will be a cash penalty for exceeding an agreed mileage, typically set at 10,000 miles a year.
If you usually change your new car every few years, a PCP could likely be the most cost effective way of procuring a car. If you typically keep a vehicle for longer or are a high mileage driver, then hire purchase could be a better way of financing it.
Will I need a credit check 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.
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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? Well, 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 a write-off.
How does a PCP work?
People choosing a PCP will usually have to pay a deposit, followed by a monthly payment for the rest of the term. At the end, the customer has the option of buying the car by paying the outstanding value, often called a balloon payment, or taking out a PCP on a new car.
The guaranteed future value is the mechanism upon which the deposit and monthly payments are calculated.
How much does a PCP cost?
A PCP is based around the length of time people usually keep a new car, typically three or four years. For example, if a car priced at £20,000 was offered on a PCP, the customer might be required to put down a 20 per cent deposit. The agreed value of the car after three years might be £7000.
Therefore, the payments over 36 months would be the differential between the deposit and the guaranteed value of the car, which in this case is £9000.
The monthly payments would then amount to £250, and at the end of the term, the customer could choose to pay the agreed future value of the car (£7000) to buy it outright, or decide to choose another car on PCP.
For a £15,000 car on a four-year PCP, with a guaranteed future value of £3600 after a 20 per cent deposit (£3000), would require 48 monthly payments of £175.
These examples are simple calculations based on no interest payments on the finance, but it’s likely that interest could apply. Therefore the total payments, including the final balloon payment, would exceed the total value of the vehicle when new.
Who owns a PCP car?
The finance company rather than the customer owns the car, unless the finance is settled at the end of the term if the customer pays the balloon payment. But as almost all cars depreciate as soon as they leave the forecourt, it’s easy to see the appeal of not owning such a high-value depreciating asset.
PCPs are usually offered by manufacturers’ own finance companies, and are often given a specific name by the individual brand, such as Volkswagen Solutions, Ford Options or BMW Select.
What happens at the end of a PCP?
What if I want to buy the car?
This is the most straightforward option at the end of a PCP, as the final balloon payment will have been agreed when you took out the finance. Generally the balloon payment will be due 30 days after your regular monthly payment.
If you want to go ahead and buy the car then simply make the final balloon payment and the car is yours. Make sure you receive the documentation so you can ensure the V5C is in your name. If you don’t 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.
What if I want to return the car?
If you do not wish to purchase the car for any reason and want to simply return it and walk away, you need to notify the supplying dealer that this is your chosen course of action. It is important to note that if you choose this option you should have abided by the terms and conditions set out initially, which in most cases are a limited total mileage, regular servicing and good condition of the vehicle within fair wear and tear guidelines.
If any of these conditions have not been met you will be faced with financial penalties if you wish to hand the car back. If the car has been damaged it is not essential for you to use the supplying dealer to make any repairs, so you can look elsewhere for a better deal.
Assuming these conditions have been met, and you are up to date with the monthly payment schedule, you can simply hand the car back and walk away. It is worth bearing in mind however that if the value of the car is more than the balloon payment then you will be giving up this equity, and your monthly payments will have effectively paid for the vehicle’s rental.
What happens if I want a new car?
If you have some equity in the vehicle at the end of the term - where the balloon payment is less than the current value of the vehicle - this puts you in a strong position if you want to get a new car with a new agreement as this equity can be used as a deposit, cutting your future monthly payments. If you are trading the vehicle in the same conditions apply regarding mileage, servicing and condition. If the car doesn’t meet these criteria its value is reduced, so you will need to pay penalties in order to trade it in.
Even if this is the case you do not have to return to the same dealership in order to start a new agreement for a new car. Another dealership can purchase the vehicle from the finance company to release the equity for a new deal, so you still have the freedom to shop around.
What if you want to end a PCP early?
What is voluntary termination?
Voluntary termination is a legal right afforded to consumers by the Consumer Credit Act 1974, giving you the option to terminate a PCP or HP agreement. This can only be exercised by you if you have paid 50 per cent of the total amount payable, or you pay additional sums to reach this point.
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 the 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:
1. You must have repaid 50 per cent 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 percent of the total amount payable tends to be near to the end of a PCP.
2. The vehicle is in good condition and there is no damage other than fair wear and tear.
What other options are there?
If you are struggling to meet your payments and voluntary termination is not an option, contact the finance company (check your paperwork for the details) and explain to them your situation.
Financial institutions have a duty to assist you if you are in financial difficulty 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.
Another option is to settle the agreement early. You can 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 term as the amount of interest you pay is less. 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.
PCPs: What else should I know?
It is important to read and understand the terms of the agreement before signing. Any interest or fees would mean a higher amount would ultimately be paid than the monthly payments, and there are other costs associated with running a car which will not be included in the PCP, such as fuel, servicing, maintenance and repair, and insurance.
Cars with strong predicted residual values will often have a higher guaranteed future value. While this might make them a bit less affordable at the end of the terms should the customer decide to buy the car, it usually means modest monthly payments. It also means cars such as the Volkswagen Golf, Mini and BMW 3 Series often have attractive PCP rates.
