What is PCP (Personal Contract Purchase)?

The Facts

PCP is a type of HP (Hire Purchase) agreement with three end of contract options. Unlike a standard HP agreement, you won’t be paying off the full value of the loan during the hire period and you won’t own it at the end of the agreement unless you choose to. It can sometimes be seen as a more complex way of buying a vehicle as it’s an agreement which incorporates a non-ownership aspect (hire) with an ownership aspect (purchase) albeit the purchase is not compulsory. So how does it work? The agreement can be broken down into three main parts:

1. The Initial Payment

You may hear this incorrectly referred to as a deposit.

Typically, the initial payment amount is open to negotiation. The lender would generally be looking for an initial payment of around 10% of the vehicle’s price but the initial payment can be as little as your first month’s payment. However, please remember the amount of your initial payment influences the amount you borrow from the lender, and therefore this determines the amount of your monthly payment.

2. The Loan

The amount you borrow is based on how much the lender predicts the vehicle will lose in value during the agreement. This loss is calculated by considering the term of the agreement and the mileage that you expect to cover, less your initial payment. You will pay this amount off during the hire period of the agreement, plus any interest applied by the lender. So, remember, you are not paying off the full value of the vehicle during the hire period.

3. The GMFV (Guaranteed Minimum Future Value)

You may hear this incorrectly referred to as a balloon.

This is the amount the lender expects the vehicle to be worth at the end of the hire period. You don’t have to pay the GMFV, this is the amount outstanding if you want to take ownership of the vehicle.

What options do you have at the end of the hire period:

1. Part Exchange

Obtain a valuation for the vehicle, if this exceeds your GMFV the difference is yours. Your GMFV is what you still owe providing this is done at the end of the hire period and you are not in arrears at the time. The vehicle’s value will be based on its condition, mileage and market trends.

2. Hand the vehicle back

If the vehicle’s value is less than your GMFV, or you choose not to keep it, you can return the vehicle to your lender. If you have exceeded your stated mileage, or, the vehicle has damage over and above the fair wear and tear guidelines (these should have been communicated to you at the start of your agreement), you will be charged for this by your lender.

3. Buy the vehicle

By paying the GMFV you will take ownership of the vehicle. There may be an ‘option to purchase’ fee added, this would have been laid out within the agreement. It is a legal requirement for you to have been made aware of this fee on the initial quotation.

What happens if you hand back the vehicle?

The hand back option does have its pitfalls; the vehicle will be subject to an inspection. This is where any damage identified that falls outside of the lender’s fair wear and tear policy will become chargeable to you. At the same time, they will check to see if you have exceeded the agreed mileage, if this is the case, excess mileage charges will also be applied, these charges are based on a pence per mile basis and would have been set out in your quotation and agreement.

When deciding if a PCP arrangement is right for you, the main principles to consider are:

  • The primary use of the vehicle and what wear and tear might occur
  • You need to know your expected annual mileage
  • Do you want to have an ownership option?

With these principles in mind, it can be a very simple way of using a vehicle with minimal risk to you, and if you do want to take ownership, you know what you will have to pay from the outset. To summarise, it’s a contract allowing you to select the vehicle your monthly budget allows, with the flexibility to decide what happens at the end of the contract.

Note, if you settle a PCP agreement early, you will be entitled to a rebate of interest which is calculated using the actuarial formula.

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