Personal Contract Purchase

Personal Contract Purchase or PCP as it’s often referred to is a popular vehicle financing option.

PCP is a flexible option that typically offers lower monthly repayments than other methods of financing. This is because the instalments you make only cover the partial cost of the new car (usually a third of its list price).

Personal contract purchase can be used to fund the purchase of a new or used car, however interest rates tend to be a less competitive on used models.

The balloon payment

Once all of the deposit (usually around 10% of the car’s price) and all of the agreed monthly payments have been made, the borrower will need to pay a “balloon payment” in order to own the car outright.

The balloon payment is simply a chunky final payment that makes up the remainder of the car’s value. It is set based on the Guaranteed Future Minimum Value or GMFV. This is essentially the minimum amount that the dealer thinks the car will be worth at the end of the agreement.

The GMFV protects you as the buyer against any unexpected drops in value. Equally, if the car is worth more than the GMFV at the end of the agreement, the difference can be used as equity as a deposit towards the next PCP deal.

Who is PCP best for?

Personal contract purchase is a popular choice amongst those who like to get new cars every few years. For those who are looking to keep the car longer, then a hire purchase agreement or personal car loan may be a better option.

The interest rates on PCP are typically fairly low, however dealers will set mileage limits as part of the agreement. If the borrower exceeds the mileage limits, charges will be applied, usually at a pence-per-mile rate.

It is also your responsibility as the borrower to maintain the vehicle in line with the manufacturers service schedule. If the car is damaged at the end of the PCP deal, the dealer may mark down its value.

Can I settle PCP early?

You are able to settle PCP early, but you may have to pay extra. Remember, the GMFV is based on the vehicle’s value at the end of the agreement. So, if you want to sell the car early you’ll need to pay the difference between it’s current value and what you still owe.

Some providers may even add an early settlement fee on top of the settlement amount. It is therefore very rare that borrowers settle PCP early.

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