Two main types of vehicle finance include Hire Purchase (HP) and Personal Contract Purchase (PCP). The latter is perhaps the most popular option on the market, due to generally lower monthly repayments, and additional flexibility. At the end of your term, you can choose to buy the vehicle outright,through a ‘balloon payment’, or instead you can decide to enter into a new agreement, or walk away entirely.
What is a Personal Contract Purchase Agreement?
With a PCP agreement, you’d generally make an initial deposit, and then pay monthly instalments. But what makes this different from most other loans is that you’re covering the depreciation of the vehicle, not the overall cost. This means that you’re paying towards the difference in cost, from the time of purchase to the estimated value of the vehicle at the end of your contract. So if you bought a car for £12,000, and it was thought to be worth £7,000 when your term finished, your finance agreement would be for the amount of £5,000, plus interest.
Another thing to keep in mind with a personal contract purchase deal is that it’s a type of secured loan. As the name suggests, a secured loan is a form of credit that is secured against a valuable asset, such as a home or vehicle. The most common type of secured loan is a mortgage, and vehicle finance is often considered to be the second most common.
So what does a secured loan really mean for you? In terms of benefits, a secured loan often comes with lower interest rates, as there is less risk for the lender. Secured loans are usually more accessible than other types of credit. The downside is that if you’re unable to keep up with your repayments on a secured loan, there’s a risk of your assets being repossessed.
Do I Need to Make a Deposit?
While there are some lenders who offer no deposit vehicle finance, for the most part, you’d need to make an initial contribution. How much of a deposit you’d be expected to pay would depend on your agreement, though the typical percentage is around 10% of the vehicle’s value. What make and model of vehicle you choose will therefore make a big difference to the size of your deposit.
It’s also good to bear in mind that as your deposit will close the gap between the buying price and the estimated depreciation value, it can considerably affect your monthly repayment amount. Making a larger deposit should significantly lower your instalments.
What Happens When My PCP Contract Ends?
Most personal contract purchase deals last for a couple of years and when the term comes to an end, you can choose between three options – making a balloon payment, handing back the vehicle, or trading your vehicle in for a new one. We’ve outlined these choices in more detail below:
- Make a Balloon Payment: If you’re not familiar with the term, a balloon payment is the amount of money your vehicle is estimated to be worth at the end of your contract. This will obviously be affected by the initial cost of your vehicle, your deposit amount, and the depreciation rate of the particular make and model. Once the balloon payment has been made, you’d own the vehicle outright.
- Return the Vehicle: When you come to the end of your contract, if you no longer think you need a vehicle, or you want to explore other options, you can simply hand the keys back and walk away. Just make sure you check all the terms and conditions before you do this, in case there are any additional stipulations.
- Start a New Agreement: The final option is to trade in your current vehicle for a new one. It can even be the same make and model of car if you loved your last one! The only complicated bit with this is equity – if your vehicle is worth more than originally estimated, you can put the difference towards a new vehicle. But if it’s worth less, you may need to look into negative equity options, and pay the difference upfront.
Personal Contract Purchase vs Hire Purchase
You may not be sure whether to opt for a PCP or HP agreement. If so, a few key considerations include whether you’re looking to own the vehicle at the end of the contract, and how much you can afford to pay each month. If you wish to make smaller instalments, PCP may be the best option, while anyone who wants to purchase the vehicle through finance could be better off with a HP deal.
It’s also helpful to weigh up the pros and cons of HP and PCP agreements. To help you get started, we’ve looked at a few advantages and disadvantages of PCP deals below:
Advantages of PCP
- The monthly payments are typically lower with PCP than HP
- Rolling over your contract and upgrading your vehicle is pretty straightforward
- You may be able to afford a more modern and technologically advanced vehicle with PCP, as you can spread the cost
- You might end up with more equity than anticipated, which can be transferred to a new contract on another vehicle
- You can choose what to do at the end of your contract, whether it’s buy the car, enter into a new agreement, or walk away
Disadvantages of PCP
- As a personal contract purchase is a form of secured loan, if you default on the loan, the lender has the option of repossessing the vehicle
- You may not be able to afford the balloon payment at the end of your contract, as this will be a large lump sum payment
- A PCP agreement comes with lots of terms and conditions, such as an annual mileage limit and keeping the vehicle in a good condition
Is Personal Contract Purchase the Right Option For Me?
There are a number of things to consider before deciding which car finance option to choose. For instance, you should think about how much you’re able to repay each month. If you’re looking for lower monthly instalments, PCP is one of the cheapest ways to finance a vehicle. Whether you’re likely to want a new vehicle before too long is something else to bear in mind – with PCP, you can upgrade your car when the contract ends.
Another thing you should consider is your credit rating. If you have a high credit score, you may be offered a better interest rate on your personal contract purchase deal. You can check your credit rating for free using sites like Experian and Credit Karma. Both these sites will also offer handy tips on how to improve your score.
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