If you are aiming to buy a new car, it’s wise to take a look at all options available, from paying upfront, taking out a loan to more complex mechanisms such as PCP, hire purchase and leasing options. Each will have their own benefits and drawbacks and weighing these up will help you to make an informed decision as to which option is best for you.
It is important to look at all of the options objectively, as what may or may not have suited your neighbour will work differently for your own unique circumstances. This article will shine a spotlight on PCP and how this mechanism works, so if you compare PCP car finance deals, you will be able to work out which will be the most appropriate for you.
PCP stands for Personal Contract Purchase and in essence, this divides the price of a new car into three elements. The first is a deposit which is paid up front when you order the car. The size of the deposit compared to the overall cost of the car will impact on the size of the monthly payments that you will make for between 18 and 48 months. The most common length of a PCP agreement is 36 months.
At the end of the term, the remaining value of the car leaves you with three options. You may pay a balloon payment to keep the car, you can walk away from the car, returning it with nothing to pay, or you can begin again, exchanging the car, taking out a new PCP agreement.
Unlike Hire Purchase schemes, there is a lot of freedom available to finance providers when putting together PCP deals. A PCP car finance comparison will need to take into account the size of the deposit, the number of monthly payments, the size of the monthly payments and the interest rate.
Likewise, you should also think about how big the final balloon payment you are going to be left with, and how this can be affected by the size and number of monthly payments. At the same time, it is important to make these figures work for your financial circumstances, crucially regarding the size of the monthly repayment.
If we compare PCP car finance with HP, the crucial difference is that when you take out an HP deal, provided that you keep up repayments, by the time you have finished your term you own the vehicle. With PCP deals, the size of the final balloon payment is based on the value of the car at the end of the term, rather than the full cost of the car brand new. With HP, there is no such account paid to depreciation.
Monthly payments on a PCP agreement are generally lower than those when a Hire Purchase agreement is taken out. This is due to the fact that HP deals cover the entire cost of the car. Accordingly, many people use PCP as a way of getting a more aspirational vehicle, that may have been out of reach under HP schemes.
As with PCP, you don’t own the car until the end of the HP term, even though there is no final balloon payment to pay.
Under the terms of a PCP arrangement, the car is not yours until you have paid the final balloon payment. Effectively, you are renting the car from the financer. At the end of the term, you can return the car or pay the balloon payment. You do not have to decide what to do until the end of the term. When you make your PCP car finance comparison, you should also take a look at their policy on making the balloon payment. Some finance companies will charge an administration fee if you choose to purchase the car outright at the end of the PCP term.
Since part of the way in which PCP deals are constructed revolves around the value of the car at the end of the term, it is important to look at mileage. Most PCP agreements include an annual mileage cap, which needs to be agreed at the beginning of the deal. If you go over the annual mileage limit, there is often a penalty charge payable, which in some cases can be up to 10p a mile.
Similarly, it is your responsibility to maintain the vehicle and keep it in good condition throughout the term. This is again due to the fact that a PCP revolves around the expected value of the car at the end. Should the car be returned in a poorly maintained state and all around poor condition, there could be charges payable at the end of the deal.
As with any type of finance, your credit history will be taken into account when applying for PCP. Even if your credit history is poor or limited, you are not necessarily going to be blocked from getting a car using PCP. Buyers with a poor credit history may well find that their monthly payments are a little higher than those that were advertised.
As we mentioned above, the car is not owned by you unless you pay the balloon payment at the end of the term. This is the only way in which you will end up owning the car outright via PCP. That said, a relatively low percentage of buyers end up paying the final payment, as the cost can prove to be prohibitive.
Most drivers who financed their cars in this manner are happy to roll straight into a new PCP deal once their monthly payments have been completed, making it popular with those who wish to drive a new car every few years.