What is PCP?

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In short a PCP deal is a loan to enable you to purchase a car. Unlike a normal personal loan you don’t be pay off the full value of the car and you won’t own it at the end of the deal. You can choose to own the vehicle at the end of the loan period if you take out this option.

PCP deals are fairly complex financial deals but to help you understand how they work and what you are choosing below are the three main sections of the deal.

Deposit

Car dealerships offering PCP finance will typically want around 10% of the car as a deposit. The larger the deposit the less you will have to borrow. The amount of deposit can depend on you choosing to keep the vehicle at the end of the agreement, as most people would pay the minimum deposit and return the vehicle in a 3 year term knowing they haven’t invested too much money for a car they are not keeping.

Some finance deals offer contributions on new cars but be aware this is only if you take up their specific finance offer.

The sum you borrow

You are borrowing what the finance company is predicting the car will lose over the term of the agreement, which is typically between 24 & 48 months. This is minus the deposit. You will be paying off this amount and interest calculated for the duration of the deal. Current typical APRs on a PCP are between 4% & 7%.

The balloon or balance payment

This is also known as the Guaranteed Minimum Future Value (GMFV or GFV). This term refers to how much the car dealer expects the car to be at the end of your finance deal. This sum is calculated and agreed at the start of your deal so it’s important you understand it. On completion of your finance deal you will be offered a choice on what you would like to do with the vehicle. If you choose to keep the vehicle you will have to pay this sum.

PCP Advantages

You can afford a new car for lower monthly repayments than a personal loan or hire purchase (HP).
The GFMV means that you the resale or trade in value of your vehicle is guaranteed.
Service and maintenance packages, warranties and insurance can be worked into the deal so your monthly payment covers everything to do with the vehicle and offers peace of mind motoring.
It's flexible. You've several options at the end of it - you can even buy the car if you like.
As a rule a PCP deal often enables you to buy a car you would otherwise not be able to afford on a straight repayment loan.
Most PCP deals are only usually taken out on new or nearly new cars so there is some comfort in knowing the car should be in excellent running order.

PCP Disadvantages

You don’t own the vehicle for the term of the agreement. The only time you will own the vehicle is if you choose to keep the vehicle and pay off the outstanding balloon payment.
You need to be careful if the GFMV figure is close to the actual value of the car it will affect the amount of equity you have to roll onto another deal. If there is no equity you will have to start again and find money for a deposit in order to secure another vehicle.
Be aware that going over any set contracted mileage, agreed when taking out the loan, will incur additional charges, which will be applied for every mile over the agreed total. The charges vary between dealers and should be checked and understood before signing the deal.
In order to qualify for the full GFMV at the end of the contract the vehicle must be kept in good condition. Age related ‘wear and tear’ is acceptable but any other issues that are deemed outside this will be charged back to you.
PCP’s are not suitable for business users due to mileage restrictions and wear & tear on the vehicle. The more mileage the lower the residual value.

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