What is PCP (Personal Contract Purchase)? How it Works?

Personal Contract Purchase (PCP)

PCP or Personal Contract Purchase is a boon to all those people who love to change cars in a short duration. If you intend to pay for your car every time you do buy a new car, then you are in for trouble. Add the cost of maintenance and other things to the entire sum of market value of the car. But with PCP you can get rid of such issues and end up saving a lot of money.

Personal Contract Purchase (PCP) is a variant of hire purchase. In this method of purchasing a car, you never own the car and only pay a partial sum of money for the car. By the end of the contract, you can choose to keep the ownership of the car if you want to.

The PCPs can be broken into three primary parts:

• The Deposit: Lenders for PCPs usually want about 10% value of the car to be deposited. However, if you want to deposit a sum larger than the 10% value, you can do so. Remember that the larger your deposit, a lesser amount of money you pay back.
• The Borrowed Sum of Money: PCPs work on the simple concept of calculations of the wear and tear of your car and how much your car will lose. At the begging of the contract, the finance company or the lender will calculate the value that your chosen car will lose at the end of the contract. The term for calculating such amounts is usually between 24 to 36 months. Your deposits are deducted from the amount the finance company comes up with, and the remaining sum of money has to be paid by you.
• The Balloon Payment: GMFV or Guaranteed Minimum Future Value is the value of your car at the end of the contract. This value is agreed upon at the beginning of the contract, and you are not liable to pay this amount. However, if you do want to own the car, you will have to pay this sum to the lender or the finance company.

How does Personal Contract Purchase work?

Ideal for those who change cars regularly, PCP is the best way to get new cars without paying the entire value of the car, thereby saving some money. However, it must be borne in mind that cars owned with the help of such contracts offer you only the choice of ownership at the end of the contract, you are never the owner.

Now that that is out of the way, how do these contracts work? The working of PCPs is simple and extremely straightforward. Personal Contract Purchase’s contract is always for a certain number of days. At the beginning or at the time of signing the contract, the value of the car at the end of the term for the contract is calculated and deferred.

This deferred amount is called Guaranteed Minimum Future Value (GMFV). The GMFV is nothing but the expected calculation of your car. The GMFV considers how old your car will be at the end of the contract by considering the number of years elapsed since signing the contract for a particular car and considers the expected number of miles your car may run during the contract.

PCPs have yet another unique feature. Apart from giving you a way to purchase cars, your lender will pay the future cost of the car in full at the end of the agreement or contract. GMFV is deferred to the borrower’s account at the end of the contract. The deferring of GMFV allows for smaller repayments. Deferred GMFV ensures that your payments will be smaller than what a regular hire purchase contract would have offered you.

Other than this, PCPs are highly flexible. If you do not like the car or need to change to some other car, PCPs allow you to get into a newer contract with your lender without going through the tedious process of looking for a new lender and getting rid of the pervious car.

What happens at the end of a Personal Contract Purchase (PCP)?

Personal Contract Purchase (PCP) allows you to get rid of the excessive worries of buying a new car every time you change your car. Here are the options available to you at the end of the contract:

• Buy the car: As mentioned earlier, PCPs do offer you the option of purchasing the car you want at the end of the contract. There will be no extra charges, as long as everything is as per the contract, and you will only have to pay a limited sum of money. However, do keep in mind that you may have to pay a processing fee, which may be anything below or of the value of £500.
• Hand the Car Over: Personal Contract Purchase is one of the best ways to get a car for a short duration. The value of the car and the terms and conditions for the car are agreed upon at the time of the signing of the contract. At the end of the contract, if you do not want to purchase the car, you can hand over the car and walk away.
• Get a New Car: This is the most common path taken after the contract is over. Because of the balloon payment method, you will find that your car’s value is slightly higher than before. At this point, your lender will ask you if you want to use this increased value as “equity” for your next purchase. This will help you get a new contract easily. To explain here is an example- if the car you had been using is worth £6000 and due to the balloon payments, the car’s value at the end of the contract is £5000, then you can use this benefit to get a new deal.

Are there extra charges?

A valid query in regard of PCPs is that, “Are there any extra charges?”

Here are some of the possible extra charges for your car:

• Over mileage charge: When you sign a contract for PCP, the calculations for mileage and other valuations are already made. However, for some reason, if you do exceed the limit as specified in the contract, extra charges will be liable. The cost of such charges will depend on the company and its policies.
• Damage Charges: It goes without saying that the damages for the car will be payable on your end. Normal wear tear for the car is acceptable. However, scratches and damage to the body of the car due to the borrower’s mistakes is not payable by the finance company. The car must be returned to the company in a position where the company can sell the car without any problems.

PCPs are a good way to use cars. For all those who change cars on a regular basis, for whatever reason, you can find a finance company that offers you PCP deals. These deals are well-calculated beforehand and offer you no hidden charges. However, at the end of the contract, if you violate some terms mentioned in the contract, the cost will be borne by you and not the finance company or the borrower. Furthermore, these contracts are basically short-term contracts for about 24 to 36 months.

Getting a new car becomes easy with PCP.

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About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.