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Personal Contract Purchase (PCP)

A Personal Contract Purchase agreement (“PCP”) is a type of Hire Purchase agreement.

Unlike a normal hire purchase agreement, 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 hire purchase.

Under a PCP agreement sponsored by employers (e.g. instead of a company car), 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.

Under a 'normal' PCP agreement, ownership of the car transfers only transfers to the buyer at the end of the finance agreement, just as in a traditional hire purchase agreement.

What 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 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

Because the car's future value at the end of the finance agreement is fixed, you know how much deprecaition 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 he agreement is more than the forecast resdual value you can sell the car for the actual value and either keepo the difference or use it as a depoist 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

If you exceed the agreed contract mileage you will normally incur and 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).