Personal Contract Purchase
What is Personal Contract Purchase?
Personal Contract Purchase (PCP) is an affordable and hassle-free car purchasing option and is quickly becoming more popular as consumers aim to avoid the pitfalls of car depreciation. PCP involves leasing a vehicle for a set period of time (usually 36 months) at a fixed monthly charge. The charge is determined by the following five factors:
1. Cost of the vehicle
2. Mileage covered
3. Length of the agreement
4. The estimated value of the vehicle at the end of the contract
5. The size of the deposit which you pay at the start of the contract
Why Choose Personal Contract Purchase?
Similarly to hire purchase, you pay a deposit followed by monthly instalments but the advantage of personal contract purchase is that the payments are usually lower, so you can afford a flashier car! The lower cost is achieved by deferring the Guaranteed Future Value (GFV) of the car to the end of the contract. The GFV plus your deposit, is then taken away from the cash price of your vehicle, leaving your monthly payments to be calculated from the remaining balance.
Further benefits of Personal Contract Purchase include:
· Only a small deposit is required.
· Many schemes include servicing and maintenance in the price, providing the driver with fixed price motoring.
· Unlike Finance Lease, at the end of the purchase you don.t have to pay a balloon payment, you have the option to walk away, or swap to another PCP agreement - ideal if you like to swap your vehicle regularly.
· Previously unaffordable cars become affordable with the reduction in monthly payments.
· If the trade-in value is greater than the GFV, the difference can be used towards a deposit on another PCP.
· You can sell the vehicle privately at the end of the agreed term and keep any profit over and above the GFV.
The disadvantages of Personal Contract Purchase
You may feel slightly trapped at the end of the fixed term, as you are stuck with the option of paying a balloon payment for the car, walking away car-less, or getting tied into yet another PCP. If you exceed the agreed mileage quota, you will have to pay an excess when you return the vehicle.
How Can I lower my monthly payments for PCP even further?
Extend the contract period, for example, a 36 month agreement is certain to make your choice of car more affordable than a 12 month agreement. Paying a larger deposit at the outset will also contribute towards smaller monthly payments. A final tip is to calculate your annual mileage as accurately as possible as this will prevent paying a higher balloon payment at the end of the fixed term.
