PCP Financing Deals
PCP and car lease deals – Your options
Choosing the right car financing option for your new car can be confusing, particularly in the UK where every manufacturer is intent on pushing their own finance options.
Car dealerships will often earn more from a finance agreement than from the often skinny profit margin held in the car itself. Despite this, there are still some great car financing deals on today’s market that may suit your personal circumstances.
PCP (personal contract plan or personal contract purchase) is one possible solution.
The Difference between PCP and Hire Purchase
In many cases, new car owners opt to finance their purchase using Hire Purchase, which pays off the car’s complete value over a set number of monthly instalments. However, PCP is a type of car financing that essentially means you are only paying off the depreciation of the vehicle. You sign an agreement to pay for a specified amount of time.
Simply put, while you borrow the same amount of money in each case, you only repay a portion of the amount you have borrowed with PCP financing. When your PCP agreement ends, a final value (frequently referred to as a balloon payment) is still due in order to purchase the car.
However, how you choose to handle this final value amount is dependent upon whether or not you choose to retain the car or trade it in for a new car. These options will be discussed in detail below.
Why Car Owners Choose PCP Financing?
One of the biggest advantages associated with financing a car on a PCP is that you are responsible for paying off a significantly smaller sum of money. This can greatly decrease your initial deposit amount, as well as result in a much lower monthly payment and/or shorter period of repayment.
Think about how often you purchase a new car. The average person does so every three years with a small deposit amount. In this situation, a PCP finance deal would result in a substantially lower monthly payment than HP financing.
However, you have to keep in mind that there is a stipulation at the end of the agreement that requires you to settle the outstanding balance, though you do have several options as to how you do this.
If you purchase with HP, your monthly payment will be higher, but you will own the car at the end of the agreement without having to make a balloon payment.
Essentially, the same car results in a smaller monthly payment with PCP compared to HP. On the other hand, you can purchase a more expensive car on a PCP for the same monthly payment amount as HP. This is an aspect of PCP that appeals to some of those planning to buy a car.
How do Dealers and Manufacturers Benefit from PCP?
There are two simple, yet very attractive benefits.
First, a customer is able to afford a more expensive car when their monthly payment amount is lower.
Second, at the end of the agreement, the customer usually opts to buy a new car using PCP financing. This is almost certain to result in repeat business. Continuity is good for business.
A Complete Look at PCP
As with Hire Purchase, a deposit is put down on the new car and the remaining balance is financed. However, there is a maximum deposit allowed with a PCP. A deposit can be made in the form of cash or you can trade-in your current car and the value minus what is owed will be applied to the deposit. While the deposit is typically around 30% of the entire cost of the car, it does vary from one finance company to another.
In most cases, PCP agreements last from 18 to 48 months, though 36 months is most common. Again, in most cases, the longer the term you choose, the lower your monthly payment will be. However, it is important to note that there may not be a significant difference because longer terms result in lower balloon payments. This is further discussed below.
3. Guaranteed Minimum Future Value (The Balloon)
The key to a PCP agreement is the Guaranteed Minimum Future Value (GMFV).
Above, it was explained that you only pay back a portion of the amount you are borrowing on PCP. When applying, a predicted minimum value for your car at the expiration of the agreement is calculated by the finance company. Next, the difference between the total price you are paying and the predicted value is calculated. This sum is divided among your deposit and monthly payments.
When the agreement expires, you are responsible for settling the finance agreement. There are two ways to do this.
First, you can simply choose to return the car to the dealer.
Second, you can opt to pay out the remaining balance and keep the car.
The finance company does guarantee that your car’s value at the time of payoff will be at least equal to the outstanding amount. However, this is subject to specific conditions.
Essentially, you can fulfil your financial obligations by giving the car back with no questions asked. If the car’s market value is less than the outstanding amount, this becomes the finance company’s problem, not yours.
4. How Does the Finance Company Calculate the GMFV?
The finance company is responsible for determining what the minimum value the car is expected to be when the agreement expires. To do this, they look at three things.
- The make and model of the car you are purchasing, especially features or options that could potentially increase the car’s final value.
- The length of the agreement (Keep in mind that a car will be worth less in 4 years than it would be in 2.)
- Your estimated annual mileage (After all, the more miles that are on a car, the less it is worth.)
The future value is typically set low because it will be their loss if the value is less than the amount owed at the end of the agreement. Finance company’s work under the idea that the car’s value will be slightly more than the amount owed when the agreement expires. This often inspires customers into repeating the process and becoming long term clients.
5. A Look at Your Final Options
The finance company will write you prior to the end of your PCP agreement to remind you that it is almost time to settle your outstanding balance.
So, what can you do?
Give the car back. This is subject to a couple of conditions including the car must have been serviced on schedule (usually it is required that this is done by the manufacturer), the agreed upon mileage cannot have been exceeded, and there can be no repairs beyond the expected normal wear and tear.
Trade-in your car for another one, though it doesn’t have to be from the same dealer or manufacturer. If you opt to work with a different dealer, they will assist you in settling your current financial situation. In the event that your car’s value exceeds the GMFV, the extra amount (referred to as equity) will be applied to the deposit of your next car.
For example, if your GMFV is £5,000 and you are offered £8,000, the extra £3,000 will be put toward your next purchase. This is the option that most people select as a way to settle their PCP.
Pay off the balance or refinance it. This allows you to keep your car. If you have the cash, you can pay it off completely and own it outright. If you do not, you can choose to continue paying the remaining balance until the debt is completely satisfied. This essentially makes your PCP into HP.
In some cases, you may be able to privately sell the car and pocket any money over the GMFV. However, you should discuss this with your finance company first. While some will allow it, others do not. I recommend to find out this information before forming an agreement.
6. Settling Your PCP Early
While this can be done, it is important to realise that the finance company does not guarantee the car’s value against your settlement until the end of the agreement.
For example, if you choose to sell your car three years into your four-year agreement, you will be required to pay the difference between what your car is worth and what is still owed. This is referred to as negative equity.
If your financial settlement figure is £10,000, but your car is only worth £8,000, you must pay the additional £2,000.
In addition, there is typically a fee associated with settling your agreement, though it is not typically a large amount.
There are some finance companies that will allow you to pay lump sums during the terms of the agreement to either move the end-date up or to reduce your monthly payments. Some will allow this at no charge, while others will charge you. Then, there are some who will not allow this at all. Make sure you know the answer to such questions before you sign a contract.
7. Is PCP Right for You?
Make certain that you fully understand the finance agreement before you sign any paperwork. This includes knowing how much you will be paying in fees and interest.
Be sure this will not overextend you financially. There are usually hidden expenses with a car. It’s prudent to consider that your financial circumstances may change as well. I would ensure I have at least three monthly payments set aside just in case.
If you’re someone who enjoys trading your car every few years, a PCP may be a very cost-effective way to do this. However, if you prefer to keep your car for longer periods of time, HP may be your best option. This enables you to make larger payments and pay off the car earlier than smaller payments that require a big payment at the end.
Always be sure to completely read the financial documents. Be certain that you are comfortable with the numbers offered. Do not be afraid to ask questions! Make certain that you fully understand the financial consequences of the agreement before you ever sign any paperwork.
If you have any other questions or need some additional help you can always contact me via email and I will do my best to help.
Find out which companies I recommend for Personal Contract Hire deals in the UK
The Used Car Guys tip: Many supplying dealers will insist that the car is serviced by them as the main agents. This will certainly incur more costs on your part. Main dealers labour charges are often double that of a regular workshop.
Also, consider parts. It’s always best to fit genuine parts to a car however, there are some reputable parts suppliers such as Bosch that make pretty reasonable parts at cheaper prices. But main dealers will insist on using their genuine parts which will cost you more money.
I would guesstimate (depending on many factors) that the additional costs of servicing at the main dealers will be equal to one extra (PCP) monthly payment each year. Having said that, some PCP offers will include servicing as a part of your monthly payments.
Bank Loans for a used car here
Credit Cards for a used car purchase here
Car Finance Deals and Calculator here
Guaranteed Asset Protection (GAP) here
Guaranteed Car Finance here
Hire Purchase Information here
The Used Car Guy