Personal Contract Purchase, also known as PCP, is a popular way of financing a vehicle and is usually based upon a Hire Purchase (HP) agreement. The main difference is that the vehicle’s value at the end of the agreement is calculated at the start and is then deferred. This is referred to as the Guaranteed Minimum Future Value (GMFV) and is based on various factors including the starting mileage, the user’s projected annual mileage and the cars age.
At the end of the term, a PCP agreement allows the user to either pay the GMFV to own the car or return the car to the lender with nothing further to pay provided the user has not exceeded the projected annual mileage and the vehicle is in the expected condition.
Under a PCP agreement, monthly instalments are based on the amount borrowed minus the GMFV.
- You can pay the GMFV and own the car outright
- Trade the vehicle in by using any existing equity as a deposit for a new vehicle (provided the market value is more than the GMFV)
- Hand the vehicle back (charges apply if you have exceeded the annual mileage that was agreed at the start of the agreement or the vehicle is not in an acceptable condition)
Benefits of Personal Contract Purchase
- Flexible deposit options at the start
- Lower monthly payments than Hire Purchase
- Fixed monthly payments throughout the term of the agreement
- Choices at the end of your agreement
Things to consider
A PCP agreement could work out to be more expensive overall compared to a hire purchase agreement for an equivalent vehicle. This could be the case if you choose to enter into a second finance agreement to pay the deferred future value of the car at the end of the first agreement.
If you decide to return the vehicle, make sure it is in good condition as you could be responsible if it is not.
Make sure you estimate your annual mileage with care as there will be charges for additional miles above the amount agreed.