Finance Myths answered (PCP)
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, 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, but it is not always the same figure.
Will there be restrictions on how I can use the car during the PCP deal?
Yes, all PCPs include an annual mileage figure and assume that you will hand the car back after three years in excellent condition – so no kerbed alloys, no scratches or dents on the bodywork, and the interior clean and intact. The annual mileage limit will typically be something around 10,000-16,000km per annum, which will then allow the car company’s finance department to set a GMFV, based on the expected distance the vehicle will have covered when it is handed back. There are penalties for exceeding a pre-agreed mileage rate, usually on a cents-per-kilometre basis, and if you do lots of kilometres per year (say, more than 25,000km), then that will decrease the vehicle’s GMFV and increase your monthly PCP payments.
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 find every last cent of 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?
Sadly, no. Like any sizeable financial loan (such as a mortgage or a bank loan), the earlier you break out of it, the more capital that is left on the loan needs to be paid. Think carefully before signing up to a three-year PCP, then, because you can’t just drop in and out of the deal as you wish. Having said that, there is a clause in all PCP agreements called Voluntary Termination, which means you can cease the contract – but there need to be specific reasons, covered in the terms and conditions of the PCP, to do this.
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.