Finance Myths answered (PCP)

Looking into the common concerns regarding Personal Contract Plan deals.

We’ve already covered the difference between a Personal Contract Plan (PCP) car-buying deal and Hire Purchase (HP) in a previous feature, but if you’ve decided to go with the former, you’re in the new-car-buying majority – it’s favoured by around 70 per cent of customers. But what are some of the potential concerns relating to PCP? Read on, as we answer the key FAQs…

Will I own the car at the end of the PCP deal?

Assuming a 36-month PCP for all answers below, for the sake of ease, then no – after three years, you won’t own the car in full… unless you pay the final payment in the 37th month, often known as a balloon payment. This will be around or about the car’s Guaranteed Minimum Future Value (GMFV) that was set at the start of the PCP.

Will there be restrictions on how I can use the car during the PCP deal?

PCP’s are set for a 3yr old vehicle on a 3 year PCP agreement.  In order to place a GMFV amount, it must have an average mileage amount to gain a figure. If you hand back the car and it has more mileage than the agreement, an excess mileage charge is applied.  Also if the vehicle is returned in less than reasonable condition, a fee will apply to fix the vehicle.  However, if you keep the car and pay off the remaining balance or refinance the amount owing, mileage and condition of the vehicle don’t apply as you are keeping the car.

If you decide to move into a new PCP agreement, they will value the car as normal with its current mileage and condition.  The finance owing on the car is taken into account and any difference in the two figures will form the deposit into the next deal.

What if the GMFV is the same as the actual value of the car after three years? Will I have equity for a new loan?

No, you won’t. PCP is all geared towards you changing your car every three years, as it’s an incentive to keep new-car sales ticking along. Most car companies’ finance departments do set fair GMFVs based on pre-agreed mileages, but there is every chance that when you hand the car back after three years, it will only be worth the GMFV. In that instance, if you’re looking to buy another new car, you’re going to have to pay a deposit for the new vehicle from somewhere else.

Do I have to keep doing new PCP deals with the same manufacturer, if I decide not to make final balloon payments each time?

No, you can take any make of car back to any other manufacturer, although you might get slightly preferential treatment and valuations from the same car company, as you’ll be displaying customer loyalty.

Can I break out of a PCP deal and hand the car back early, with no financial drawbacks?

You can settle the PCP agreement at any stage.  You will be charged future interest ( XX months depending on the lender).  This is agreed by the lender with the Central bank of Ireland. 

Can a big deposit make PCP monthly loan payments even lower?

Yes, but there is typically a limit to the maximum deposit you can put down on a PCP, nominally 35 per cent of the vehicle’s new value. Some PCP deals allow you to place no deposit, but anything between seven and 35 per cent is the norm.