Finance has become a much more popular way for people in the UK to fund their car purchases over the last few years, and one of the most common types of loan is known as personal contract purchase or PCP.
PCP deals can be attractive, but they are often quite complicated and there are potential risks involved in signing up to this kind of arrangement.
How does PCP work?
Like other types of finance such as leasing or loans, PCP allows drivers to spread the payments for a vehicle over a long period, typically two or three years.
PCP is a bit like hire purchase, but there are some important differences. Customers pay a deposit on the car they want and make monthly repayments until the end of the term. When the term ends, customers have a choice: they can make a lump sum payment – known as a balloon payment – in order to purchase the vehicle outright. Alternatively, they can use any equity they have in the deal – if the car has maintained more of its value than expected – to put down as a deposit on a new vehicle, via a new PCP deal.
Or they can just hand the car back and walk away without making any further payments.
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Who offers PCP deals?
These types of finance package are normally offered by motor manufacturers or car dealerships on the vehicles they make or which are on their forecourts. PCP is also available from some finance companies.
What are the advantages of PCP?
Typically, monthly payments with PCP are lower than with hire purchase, because with a PCP there is a balloon payment at the end of the term. It can be simpler with PCP to roll the deal over at the end of the term and get another new vehicle. And customers are protected to some extent against depreciation – if the value of the vehicle declines quicker than expected during the loan term, it can simply be handed back to the finance provider.
What are the potential risks involved?
One of the main downsides with PCP is that there is no guarantee you will become the outright owner of the car at the end of the term. If you can’t afford to make the balloon payment, for example, you will have to hand the car back or start a new PCP deal.
There are likely also to be limits on annual mileage – these should be agreed at the start of the deal, and will affect the amount you have to pay. If you exceed these limits, you will face financial penalties.
In addition, customers are required to keep their vehicles in good condition and pay to put any issues such as damaged or scratched bodywork right.
Finally, if during the PCP term you are unable to continue making your monthly repayments you will have to give the car back. At this point, if the car’s value has fallen faster than expected, you may have to make a lump sum payment in order to make up the difference.
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