Personal Contract Purchase

Personal Contract Purchase – what is it?

Personal Contract Purchase (PCP) is an increasingly popular form of vehicle finance. It is an agreement that runs for a specified period of time and has several alternative options at the end of that period.

Contracts usually run for two to four years and offer fixed monthly repayments with a portion of capital left to the end of the term.

Who should use PCP finance?

PCP is for individuals who want to run vehicles, avoid the risk of depreciation and disposal, but may want the option to purchase the vehicle at the end of the finance period.  There is a similar funding option for companies.

The guaranteed future value is calculated at the start of the PCP and among other things will depend on the amount of mileage you agree to do over the lifetime of the financial agreement as well as the likely depreciation to be expected.

What are the options at the end of a PCP?

You may:

i) Hand the vehicle back

ii) Pay the guaranteed future value to buy the vehicle

iii) Use any equity in the vehicle as a deposit on another one

The benefits and disadvantages of PCP

This is becoming a more popular way to buy a vehicle. Leaving a lump sum to the end of the agreement keeps the monthly payments lower which makes it a cost effective method of paying for a vehicle or enables you to run a better-quality car than you would normally be able to.

With this type of agreement you would have the opportunity of changing to a new car every few years and the risk associated with the residual value and depreciation is carried by the finance provider, not you.

On the other hand, you will be restricted to a defined level of mileage and have to make a decision about what to do at the end of the finance period.  There is also the risk that you will be asked to pay for any repairs if you decide to hand back the vehicle.

It is also important to note that following on from the EU Referendum and the decision that the UK will leave the EU, any imported vehicles are likely to cost more because of the reduction in the value of £Sterling, so PCP monthly payments are likely to increase.