What is Personal Contract Purchase (PCP)?

Personal Contract Perchase is the most flexible solution to financing a new car. PCP is a finance option that enables you to put down a small deposit, and make afordable monthly payments. At the end of the agreed term you are given an option to pay off the balance of the car – in which case you will own it outright, or to review your agreement by upgrading into a new car. Below we have put a few details of how PCP works, and a brief summary of its main benefits.

How Personal Contract Purchase works:

Deposit

As with a Higher Purchase agreement, a buyer will put down a deposit on their new car and finance the balance.  With a Personal Ccontract Purchase, there is a maximum deposit that is allowed (this varies from manufacturer to manufacturer and finance company to finance company), but usually it’s about 30% of the total price of the car.  Your deposit can be cash or your current car as part-exchange (trade-in), or a combination of both.

Term of agreement and repayments

Most PCP deals are available for anywhere between 18 and 48 months, although the most common is 36 months.  Over this period, monthly repayments are made which work towards paying off the balance of the car. As a general rule, longer terms agreements give lower monthly payments, although it’s not necessarily a dramatic difference. The interest rate varies by manufacturer and model, from 0%, anywhere up to 9%. Mazda currently are running some fantastic 0% APR deals across their Mazda 2, Mazda 3, Mazda 6 and Mazda MX-5 range.

Guaranteed Minimum Future Value and final repayment

The Guaranteed Minimum Future Value (GMFV) is the key to how a PCP works.  The deposit and monthly repayments are only paying back a portion of the total amount you have borrowed.  When you apply for a PCP, the finance company calculates a predicted minimum value for your car at the end of the agreement. this depends on a variety of factors inclduing the mileage you are travelling each year. Your deposit and monthly payments are paying off the difference between the initial buying price and this predicted value.  This final value then needs to be paid to settle the finance agreement, either by returning the car or paying out the remaining amount.

The finance company guarantees that, subject to certain conditions, that the value of your car at this time will be at the very minumum the same as the amount outstanding (hence, a Guaranteed Minimum Future Value).  So, if you want, you can simply give the car back to the finance company and the finance is settled.  If the market value of the car is less than the amount outstanding, that’s not your problem – the finance company takes the loss. At this point, many people choose to renew their finance agreement, using any additional equity as a deposit for a new car.

Benefits:

Ideal if you are looking to renew your car more often, when you buy a car on Personal Contract Purchase  you don’t have to put down a large deposit. A small deposit followed by afordable monthly repayments means you can usually get more car for your money. Monthly payments can be kept lower than on other finance agreements because there is an “Optional Final Payment” (often called a “Guaranteed Future Value”).

If you are looking to upgrade your carmore frequently this can be an extremely cost effective method for allowing you to do so. This option also offers more flexibility at the end of the agreement and protects you against future residual values.

 

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