What Is Personal Contract Purchase (PCP)?

   What Is (PCP)?

PCP is a way of getting a vehicle on finance but deferring part of the repayments until the end of the finance agreement.

Unlike a normal finance agreement where the total cost of the item is repaid in monthly instalments, in a PCP arrangement payment for part of the cost of the car is postponed until the end of the agreement.

Because of this the monthly repayments are lower than ordinary finance repayments, as all that is repaid during the finance period is the forecast depreciation in the car's value.

Depending on the precise finance product, under a PCP agreement ownership of the car transfers to the buyer immediately, rather than at the end of the finance agreement (as in a traditional hire purchase agreement).

In some PCP agreements though, ownership of the car only transfers to the buyer at the end of the finance agreement.

These particular agreements can't be used by drivers taking a cash allowance instead of a company car if their employer is involved in the car supply arrangements, for example by introducing a supplier or negotiating special discounts for employees.

In addition, these arrangements are currently under review due to changes in interpretation of VAT law which may require VAT at the standard rate to be charged on the PCP monthly payments if:

  • ownership does not transfer to the buyer at the beginning of the PCP agreement; and
  • the final payment is broadly equal to the car's forecast value at the end of the agreement.

Keep checking back here for more information on this developing issue.

What Is In The Payments?

You make monthly repayments that cover part of the money you have borrowed, plus interest Charges on all of the money.

The part you repay in the monthly instalments is the car's expected depreciation over the finance period, rather than the full cost of the car.

To arrange this the finance company sets aside from the monthly repayments what it expects to be the car's value at the end of the finance agreement (the 'residual value' or 'Guaranteed Minimum Future Value' - GMFV). You only pay this final amount if you want to keep the car at the end of the finance agreement.

How Does It Work?

Normally the supplier of your car (or your employer in a sponsored scheme) will arrange the PCP agreement for you.

Usually a deposit will be required (typically 10% of the purchase price or a fixed number of finance payments paid in advance, e.g. 3 or 6 months payments).

In employer sponsored schemes an advance payment is not normally required.

Effectively the finance company allows you to repay the cost of the car in monthly payments broadly equal to the expected depreciation over the period of the finance agreement, plus interest charges.

At the end of the contract you will typically have 3 options. You can:

  • hand back the car to the finance company (subject to return conditions - see below); or
  • pay an optional final payment (sometimes called the “settlement payment”) and keep the car; or
  • if the car is worth more than the final payment, make the final payment and sell the car, either keeping the "profit" or using it as a deposit towards a replacement car.

If you do choose to hand back the car instead of paying the optional final payment then the car will normally be subject to a mileage and condition check. This is to make sure that the car has not travelled more than the agreed total mileage allowed in the finance contract and that the car's physical condition is in keeping with its age and mileage.

If the car has exceeded the permitted mileage then you will normally have to pay an 'excess mileage charge', usually a pence per mile figure which will be stipulated on the finance agreement.

In addition, if there is damage or wear and tear on the car in excess of what would be normal for a car of the same age and condition you will be charged for putting this right.

You finance company should inform you before you enter the finance agreement about what is and is not acceptable damage/wear and tear and some subscribe to the code of practice of the British Vehicle Leasing & Rental Association.

Advantages of Personal Contract Purchase

Because the car's expected future value at the end of the finance agreement is fixed in the agreement, you know how much depreciation will be and how much you will get for your car when you have finished the finance repayments.

If the value of the car at the end of the agreement is more than the forecast residual value you can sell the car for the actual value and either keep the difference or use it as a deposit towards a new car.

Because the residual value is fixed you avoid the risk of the residual value being less than expected, so you are protected from unexpected drops in second hand car values.

Disadvantages of Personal Contract Purchase

If you exceed the agreed contract mileage you will normally incur an excess mileage charge.

Unlike Personal Leasing you will normally have to make your own arrangements to pay for the annual tax disc renewal (unless you have also arranged a maintenance contract which includes this service).

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(+44 1792 224319 outside UK)