Getting a car on finance is a really exciting time. You can usually get a better car than you first thought and can pay for it in monthly instalments! In the UK, one of the most popular forms of finance is a Personal Contract Purchase (PCP). There are many benefits to getting a car through PCP, but these types of agreements don’t suit everyone. The guide below has been designed to help you explore the advantages of getting a car through PCP, how it works and the things you should consider before you commit to signing on the dotted line.
What is PCP car finance?
Personal Contract Purchase is a form of hire purchase and is a flexible agreement that can suit many people. PCP allows you to get a new or used car and pay for it in monthly instalments. You don’t have to have a deposit for PCP, but some lenders could require a 10% deposit from you so it’s worth checking before applying. PCP car finance deals can be subject to credit status but could be an option for those who want to increase a credit score.
This is because PCP is a secured type of loan which means the lender owns the car throughout the agreement and if you fail to pay, they have the right to take the car away from you. PCP can be seen as a long-term rental because you don’t have to own the car and have more flexibility at the end of the deal.
How does personal contract purchase work?
PCP allows you to get a new or used car and pay for it in monthly instalments with added interest. There are some deals which can offer you 0% interest too. Agreements can be spread over 3-5 years, and you can choose a term that suits you. Within PCP you don’t pay for the cost of your chosen car but instead pay off the depreciation, this can help make monthly payments much lower than other options.
At the end of your agreement, you can then choose to either hand the car back to the dealer, pay the balloon payment and keep the car or use the value of the car towards another PCP deal.
Benefits of getting a car through PCP
More people than ever are choosing to finance their vehicles through PCP but why are they so popular?
1. Lower monthly payments
Unlike Hire Purchase, you don’t pay for the cost of your car over the term. Instead, you cover the cost of the rate of depreciation. This makes the loan smaller and can help to reduce your monthly payments.
2. You don’t have to own the car
Many drivers choose PCP because you don’t have to be tied down to a car. If you have enjoyed using the car over the period but want a change, you can simply hand the car back to the dealer at the end of the deal and there are no more payments to make.
3. Both new and used cars
When PCP deals first hit the market, they were only available on brand new cars. However, nowadays you can finance, used, nearly new and new cars through personal contract purchase. Used cars don’t depreciate as quickly as new cars so you can benefit from even lower monthly payments too!
4. Flexible options
PCP is a flexible form of car finance. You can choose how much deposit you put down, spread them over a term that suits you and shop a whole range of different cars. PCP can also be offered by car dealers or car finance brokers.
What to consider before getting a car through PCP
Before you commit to any form of finance, it’s worth exploring all your options and getting a more detailed insight into PCP.
1. Large balloon payment
The balloon payment at the end of a PCP finance deal can be very expensive and many people can’t afford to pay for finance and save up to pay it off. However, you could look to refinance a balloon payment to help spread the cost if you want to keep the car.
2. Mileage charges
At the start of your finance agreement, you will be required to set an annual mileage limit. This helps to predict the value of the vehicle at the end of the agreement. If you exceed your stated mileage, you can be charged additional fees.
3. Damage charges
Most people choose to hand their car back to the dealer at the end of a PCP deal. Due to this, you will agree to keep the car in good condition throughout the deal. If you’re prone to a few bumps or accidents, PCP may not be the best choice for you. If the car’s condition goes beyond general wear and tear you can be liable to pay damage charges.