Personal Contract Purchase (PCP)

Personal Contract Purchase (PCP) is a form of car finance which gives the borrower the option to buy the vehicle outright or to hand it back at the end of a set contract period without any further liability. The period is usually between 24 and 48 months, but it can be longer.

How does it work?

It works like hire purchase, with an initial deposit being made, followed by a series of monthly payments. The monthly payments are usually not subject to VAT, but ownership of the vehicle is retained by the funding company.

PCP is therefore ideal if you want to have the latest cars because you can go into an arrangement to change them every 12 to 24 months, depending on your financial circumstances.

How much do PCP plans cost per month?

A variety of factors are taken into account when calculating monthly repayments for a PCP plan. These generally include the overall cost of the new vehicle, the level of deposit you put down, the interest charges depending on the interest rate set by the lender, the duration of the plan and the intended mileage.

PCP providers will also base their decisions on the vehicle's maintenance requirements and the minimum guaranteed future value (MGFV). MGFV is an agreement between the purchaser and the lender on what the car will be worth at the end of the contract. Then if you want to buy it outright you will have to make a "balloon payment", which clears the amount still left on it.

Alternatively, you can hand it back to the dealer and start a new finance arrangement. Or you can sell it privately, once you've paid it off in full, and hope to make a profit.

Is PCP safe?

A PCP plan comes with protection under the Consumer Credit Act of 1974 as it is defined as a conditional sale agreement under Financial Services Regulations (2004).

And because the PCP car finance provider guarantees the resale value of the vehicle at the end of the contract for a known, fixed amount, you need not worry too much about depreciation.

To ensure you get the best deal and extras such as maintenance and other added value services, compare the deals in the market before committing yourself.