Personal Contract Purchase - PCP

How a PCP works

You pay an initial deposit – typically the equivalent of three months payments. Then you make fixed monthly payments. The payments are invariably lower than those of a hire purchase scheme.
Then, at the end of the contract, you have three options:

• Simply return the car to the finance company. If you haven’t exceeded the agreed mileage and the car is in acceptable condition, you can just return the car and that’s the end of it.
• If you want to keep the car you will need to pay off the final payment, also know at the Guaranteed Future Value (GFV).
• Trade it in for another car. If the trade-in price is higher than the Guaranteed Future Value, you can use the difference as a deposit towards your new car if you so choose.

Why the monthly payments are lower?

The monthly repayments are lower because of the Guaranteed Future Value (GFV). As part of the process of calculating the repayments, the lender estimates what they think the car might be worth at the end of the contract. Then, using that information, the lender sets a minimum figure at which they guarantee the car will be worth. That’s called the ‘guaranteed future value’ (GFV).
 The GFV, along with any deposit you pay, will be deducted from the price of the vehicle and your monthly payments are then calculated on the balance, plus interest on the balance and interest only on the GFV.
 So your monthly payments are lower because you’re not repaying the GFV during the agreement. What happens with the GFV is explained above in the ‘How a PCP works’ section above.

How can I get the payments even lower?

There are a number of ways to lower the monthly payment. You can put more deposit down, or extend the contract period. But one important way is to ensure the contract mileage is correct. In other words, that the number of miles on which the contract is based is the same as the amount of mileage you intend to cover. The GFV is based on the anticipated mileage. If you base the contract on less mileage, the GFV will be higher which means your monthly payments will be lower.

Exceeding the contract mileage

If you do more mileage than was agreed, you’ll be asked to pay an excess mileage charge if you end up handing the car back. This doesn’t apply if you keep the car (see ‘How a PCP works’ above). The mileage excess rate is a fixed number of pence per mile set at the beginning of the agreement.

Suitability

A PCP may suit someone who prefers lower monthly payments during the period of the agreement, and is happy to address the GFV at the end of the agreement. A PCP is also often promoted as a good method for drivers who have opted out of a company car scheme. The thinking is that if your company car allowance or your mileage reclaim can fund the monthly PCP payments (along with road fund, maintenance, fuel and any other direct expenses), you’re no worse off and can avoid paying high company car taxes.

Responsibility for the maintenance and general condition

Maintenance can be included in the contract, at extra cost.It is in the user’s interest to maintain the general condition of the car. If you do, and you end up keeping the car or trading it in, you should get a better price. If you hand the car back to the finance company and the condition is below a ‘normal wear and tear’ standard, you could be faced with a bill. In simple terms ‘normal wear and tear means a condition in keeping with the age and mileage of the car – a car that is in fair working order, repair and condition. This will be detailed more specifically in the agreement itself but is not designed to catch you out. Obviously, if the Lender guarantees a price for the future, it’s only fair that the price is based on the vehicle being in reasonable condition.

Ownership at the end of the contract

Who owns the vehicle at the end of the contract? The answer is you if you want to or the finance company if that suits you better. It’s your choice – whichever is more beneficial to you.