PCP is the most widely used method of automobile financing in the UK. It stands for Personal Contract Purchase or Personal Contract Plan. Typically, PCP is provided by the automobile manufacturer's own financing company.
Things to look for when buying a new car under PCP
New car sales the UK are witnessing a significant growth. In 2013, the UK recorded sales of 2.26 million vehicles, which is a 10.8% increase over 2012. Also, this figure is the highest since 2007. A key factor behind this growth is the rise of PCP finance.
PCP finance makes it very attractive as well as affordable to buy new cars. Thanks to the demand, customers have a lot of options in terms of PCP deals for new and used cars. Some deals may require a lower monthly payment; some may offer a higher Guaranteed Minimum Future Value (GMFV) and some may ask for lower deposits. With so many options, customer can sometimes find it a big challenge to figure out the best PCP deal.
Another important factor is that in the final analysis, a PCP deal may not turn out to be as inexpensive as it looks like. That's why it is important to look at the fine print before short listing a PCP deal.
Let's look at some factors on what to look for while buying a new car through PCP.
If you are new to PCP deals there are a few terms that you will need to become familiar with:
- Guaranteed Minimum Future Value or GMFV: This is the amount expected to be the car's residual value at the end of the PCP term. The GMFV amount is used to determine the monthly installments. That's why it is important to calculate the GMFV accurately. If not calculated correctly, it can lead to losses to the consumer. Some dealers may keep GMFV very low, resulting in higher monthly payments to the customers. Let's look at an example of Skoda Octavia Diesel Hatchback 1.6 TDI CR S 5dr. For the same car, two dealers may quote a different GMFV - one may quote £6,729.00 and another may quote £6,357.77. GMFV is also known as 'balloon payment' or the final purchase price of the car. As you can see, this amount can be several thousand pounds. That's why along with the usually-attractive monthly installment, you need to make sure the balloon amount is within your paying capacity.
- Mileage: Every PCP contract has an annual mileage limit. For example, you may be allowed 10,000 miles in a year. The GMFV, and subsequently, the mileage figure is used to determine the monthly costs. Lower expected mileage will lead to higher GMFV, and thus lower monthly payments. You need to ensure the mileage figure reflects your driving pattern. You may have to pay extra if you exceed the pre-agreed mileage limit. That's because excess mileage will reduce the GMFV of the vehicle, which is a loss to the car finance company. For example, let's say excess mileage charge is 4.4 pence per mile. So if you clock 11,000 miles in a year, you will end up paying an extra charge for the excess mileage of 1,000.
- Damage: All PCP deals will include 'fair wear and tear' guidelines given by the finance company. The aim of these guidelines is to ensure that at the end of the PCP term, the car is in an acceptable state to qualify for the GMFV. According to a study, 87% of consumers buying a car under PCP don't pay serious attention to the clauses related to damages. In these guidelines, you can find all details on both acceptable and acceptable damages. There are different guidelines and expectations for body and paint, bumpers and trims, tyres, wheels and trims, interior, glass, etc.
- Early Settlement: Early settlement for PCP finance is expensive. Unlike hire purchase where you pay interest only until the day of settlement, PCP settlement can require paying up to 50% of outstanding monthly payments. So, it is important to check the settlement options with the dealer right in the beginning.
- Deposit: The deposit is the amount that needs to be paid while entering into a PCP deal. Typically, first-time PCP buyers use their old car as a deposit. Deposit can be lower in case of higher GMFV or lower monthly payment. Usually, this amount is 10% of the original price. You should look at this amount and if funds are available, go for a higher amount as this can lead to lower installments.
To summarize here are some of things you need to look in new car PCP deals
- Maximum allowed mileage
- At what rate will excess mileage be charged?
- When will the excess mileage charge be deducted?
- Read the 'fair wear and tear' guidelines in detail to avoid any unexpected surprises
- Read the settlement clauses in detail to understand the costs for early settlement
- Check the deposit amount and compare it with others
As with any finance deal, it pays to shop around and compare what PCP deals are out there. Use our free PCP car finance calculator to calculate your monthly repayments and see which PCP deal is best for you. Top Tip: Keep an eye on the total amount to be repaid to get a true comparison of PCP deals.
PCP Further Reading
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PCP Finance Further Reading