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Cheap Personal Contract Purchase

How to find the best deal for you

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By Harriet Meyer | Edited by Johanna

Updated May 2017

car loan

If you like to change your car regularly but want low monthly payments to fit your budget, personal contract purchase could be the answer. The name might sound like some arcane law, but this flexible deal could save you a lot of hassle.

Hereís a guide to break down the basics, and work out whether personal contract purchase - or PCP for short - is the right car finance deal for you.

This is the first incarnation of this guide. Please suggest any changes or questions in the PCP discussion.

Not the car finance option you were looking for? Check these out...
Personal car loan Hire purchase Leasing Buying a car with a credit card

What is personal contract purchase?

A PCP deal is basically a loan to help you get a car. But unlike a normal personal loan, you wonít be paying off the full value of the car and you wonít own it at the end of the deal (unless you choose to).

Itís one of the more complex financial products available to help you buy a car, but it can be broken down into three main parts:

  • The deposit (usually around 10% of the car's price). Dealers offering PCP finance will typically want around 10% of the car as a deposit. Some car manufacturers' finance arms offer valuable Ďdeposit contributionsí of £500-£2,000 or more if you're buying a new car but only if you take their finance - eg, VW Finance offers £1,000. The larger the deposit, the less you'll have to borrow.
  • The amount you borrow. The amount you'll have to borrow is based on how much the finance company predicts the car will lose in value over the term of the deal (usually 24 or 36 months) minus the deposit you've put down. Youíll pay this amount off during the deal, plus interest. So youíre not paying off the full value of the car. Typical APRs are 4%-7%.
  • The balloon payment (a balancing payment you pay IF you want to own the car). Also often referred to as the Guaranteed Minimum Future Value (GMFV), this is how much the dealer expects your car to be worth after your finance deal ends. It's agreed at the start of your deal. You donít have to pay this, as you get a choice of what to do at the end of the deal. But it is the sum youíll pay if you want to keep the car.
  • Be wary of 0% deals - they can be too good to be true. Some dealers offer 0%. Take these deals with a pinch of salt though, as they are likely to try to recoup their losses somewhere else by, for example, inflating the ballon payment or making the ticket price more expensive than if you would have bought the car outright (where they would have been more likely to offer you a 'discount' on the ticket price).

How does it work?

Ok, so this might sound a bit complicated so here's an example to explain how it works...

Let's imagine you sign up for a PCP over three years to buy a car with a ticket price of £18,000. You put down a deposit of £2,000 and the finance company calculates that the car will be worth at least £8,000 after three years. Here's how that would look...

To 'borrow' the car you pay...
Deposit: £2,000
Loan: £8,000 (£10,000-£2,000) plus interest
Total: £10,000 plus interest

To buy the car you pay...
Deposit: £2,000
Loan: £8,000 (£10,000-£2,000) plus interest
Balloon payment: £8,000
Total: £18,000 plus interest

What happens at the end of the finance deal?

car loan

We mentioned that you can buy the car at the end of the deal but you don't have to - in reality you have three options:

1. Buy the car by paying the balloon payment. Pay this then you'll own the car outright. Do note that most finance companies charge an added fee if you buy the car (this can be up to £500 but is usually lower).

2. Hand the car back and walk away. This means you have nothing more to pay (subject to damage, and over-mileage charges, see below for more info).

3. Get a new car. This is the most common option for people taking a PCP deal. Usually at the end of a PCP deal, the car will be worth slightly more than the balloon payment. And if this is the case, your dealer will usually ask if you want to use that 'equity' as a deposit on a new PCP deal on a brand new car. For example, if the carís actual value at the end of the deal in the example above was £9,000 and the balloon payment is £8,000, youíd have the difference of £1,000 that you could use as a deposit to roll into another deal.

Usually people go for another PCP, but you donít have to. Sadly, you can't take the extra as cash - unless you buy the car and then sell privately (or get agreement from the finance company to sell it & then pay off the finance)!

You donít have to worry about the car being worth less than the balloon payment - that is if it's lost more value than was expected at the start of the deal. If that happens, the sensible course is just to hand the car back - the finance company takes the hit.

What charges could I face if I hand the car back/trade it in?

We mentioned that you could face charges if you hand the car back, whether that's trading it in, or just handing it back and walking away. There are two main types of charges, but both are avoidable:

  • Over-mileage charges. At the start of a PCP deal, you'll be asked to specify how far you'll drive the car each year. This is so the dealer can accurately assess the car's worth at the end of the deal to set the balloon payment. A car that's done a 10,000s of miles will be worth a lot less than a car that's only been used infrequently.

    It's important to be as accurate as you can, as if you go over the agreed mileage limit, the finance company will charge 7p-10p for every mile you are over. Watch out for this, as 1,000 miles over will see you shelling out £100 at the end of the deal.

  • Damage charges. Just like when you rent a car, the finance company will check it for damage when you hand it back. Normal wear and tear is acceptable, but the car needs to be in a sale-able condition, which means you'll likely be asked to pay to put right any large scratches or dinks in the bodywork.

You can avoid these charges by agreeing a sensible mileage, and taking good care of the car. If there's damage, it's worth going to an approved service centre to see if it'll cost less to fix than the finance company will charge - it may be worth getting it fixed yourself.

The final way to avoid these charges is to buy the car - though that's not really MoneySaving!

Quick question

How is the balloon payment calculated?

Is PCP the right option for me?

If you want to change your car in a few yearsí time, PCP could be a MoneySaving way to finance it.

If you are going to keep it for longer than that, you may be better off with hire purchase or a personal car loan.

These will cost more each month as you're borrowing and paying off more, but you will own the car without taking a big balloon-payment sized hit at the end. If you do opt to keep the car, PCP is generally more expensive than hire purchase.

Only 20% of people with a PCP deal actually buy the car. If you think you're in the 80% who won't buy it, it's worth looking at whether leasing may be a better option. You don't get the chance to own the car, but you also pay less each month. Essentially, youíre just renting the car for an agreed period, so itís worth contrasting this cost against PCP.

Here are the pros and cons of PCP:

Pros

  • You get behind the wheel of a new car for lower monthly repayments than a personal loan or hire purchase.
  • You donít need to worry about the future trade-in or resale value of the car, as the lender guarantees your car will be worth a minimum sum at the end of the deal.
  • It's flexible. You've several options at the end of it - you can even buy the car if you like.
  • Dealers will often throw in service and maintenance packages, warranties and insurance so you can get your total cost of motoring down to one payment each month (though check these are free, or if not, represent good value).
  • A PCP may let you buy a more expensive car than you might otherwise be able to afford but with monthly payments to suit your budget.
  • As PCP deals are usually only offered on new or nearly-new cars, you donít have to worry about an old banger thatís likely to need a lot of repair.

Cons

  • You wonít own the car during the contract period (though this is the same for almost all dealer finance agreements) Ė and will only own it at the end if you pay the balloon payment.
  • If the predicted minimum future value is set very close to the actual value of the car you will have little equity to roll onto another deal. If there isnít any, you will have to get your hands on a deposit for a replacement car elsewhere.
  • Extra charges of 7-10p per mile if you go over the agreed set mileage.
  • The future value is based on keeping the car in good condition. Youíll be charged extra to put right anything thatís not down to normal wear and tear.

Where can I get a PCP deal?

There are two main options here. The most common is to get the finance through the dealership you're buying from. However, before you start, there are some online brokers that have decent offers when you're looking for a PCP deal - and it's worth looking at these first so if you do go to a dealership, you know what's the cheapest elsewhere and can compare.

Online finance brokers

PCP deals can be found from a handful of online brokers. These are handy to get an idea of the prices and repayments you might be looking at on your ideal car. Brokers offer a wide range of deals, including those for buyers with a tarnished credit history. They simply supply the finance through a variety of lenders.

If you are asking for a quote from any of these brokers, check whether they will do a hard or soft search of your credit file to give you a quote. If it's a hard search, be wary, as this is fully visible on your credit file to other lenders as an application, even if you then don't take out the loan. Too many of these in a short space of time is a red flag, so think carefully.

Some of these brokers will also be able to source vehicles for you, as well as finance. But you can still get your car from any dealer in the UK, and just use the broker for the loan. Funds will be sent to the dealer after the finance agreement's signed. Here are a few of the larger brokers operating in the UK:

  • Financeacar.co.uk. The Financeacar.co.uk site is one of the easier car sites to use. It's a one-stop shop that allows you to select a car make and model, then the sort of finance you're looking for, then to configure the car, and finally get a quote for how much it will cost based on your credit record. Their deals are typically between 8% and 10% rep APR.

  • Carfinance247. One of the UK's biggest car finance brokers, Carfinance247* allows you to find a deal to suit almost any budget. The way it works is that you source a car from any UK dealer. Once you've done this, and know how much you need to borrow, you can get a quote from carfinance247 to see whether it can find a PCP deal for you, and at what rate.

    It has different deals depending on your credit score, with rates starting from 5.8% APR (12.2% rep APR) and going up to 30% APR for people with a bad credit history. This is a high APR and you should see if you could get cheaper credit elsewhere, or find a different way to access a car before signing up to deals with such high interest costs.

  • Zuto. Broker site Zuto* allows anyone to apply for car finance with it, but is especially good if you'd find it difficult to get finance elsewhere, for example, the self-employed, or people with a poorer credit history.

    The rate you'll get depends on how good your credit history is. If it's excellent, rates are available from 9.9% rep APR. But, poor credit scorers could end up being charged 34.3% APR. Again, like the above, this is a really high APR, so always check you can't get cheaper credit elsewhere, or find another way to get a car.

  • Carzu. If you want a broker to look after the process of finding a car, as well as getting the finance, try Carzu (you can also use it just for finance). APRs depend on how much you want to borrow, starting from 4.8% rep APR.

  • Halifax Bank. Although not an online broker, Halifax offers a Flex Car Plan PCP deal, which provides a similar service, although it's only for its current account customers at the moment. As with the other financing methods here, Halifax will send the cash straight to the dealer you're buying from. This means it will therefore own the car until the end of the deal. Halifax has a 3.3% representative APR on its car plans.

Dealer finance

Often known as forecourt finance, or just car finance, it's offered by almost every dealership in the UK - and PCP is one of the options they offer. Dealerships come in three main types: franchised (tied to one or more manufacturers, eg, BMW garages), independent (not tied) and car supermarkets.

Getting a PCP through the manufacturer's finance arm

In a franchised dealership, finance deals are usually arranged through the car finance arm of a manufacturer Ė so Ford Credit, for example, or Volvo Financial Services. It's definitely worth looking at what these dealerships can offer you on a finance deal, especially if you're buying a new car.

If this is the case, it's not uncommon for the manufacturer to give £500-£2,000 to you as a deposit contribution, and also offer 0% finance. If you don't qualify for 0% finance, you'll usually get an advertised APR offer of between 4% to 7%; though this is representative, so if you have a poorer credit history, you could be offered a much higher rate.

It's worth saying that if you know you want to own the car at the end of the deal, PCP will give you low monthly payments, but, once you include the balloon payment you need to pay at the end, PCP is almost always more expensive than a personal car loan or hire purchase.

Getting a PCP through an independent dealership or car supermarket

Many independent dealerships and car supermarkets get their finance from big banks' consumer arms, allowing them to be able to offer the same range of deals as the manufacturer-tied dealers. Blackhorse (part of Lloyds) and Santander Consumer Finance, for example, supply finance deals to non-franchised dealerships.

These finance providers aren't tied to manufacturers, and therefore can't offer the heavily subsidised 0% finance or deposit contributions that the car companies' finance arms can on their PCP deals. If you go to one of these dealerships, expect a representative APR of somewhere between 5% and 10% - or more if you've a bad credit record.

Itís a competitive market out there Ė check whatís available online and from dealers, and ask yourself what you can really afford. Itís vital you can afford the repayments before you commit. With all these types of finance, if your application is accepted, finance is sent directly to the dealer.

Personal Contract PurchaseQ&A

  • Can I only use a PCP to finance a new car?

  • How much will I pay over the course of the deal?

  • How can I make repayments as low as possible?

  • Can I settle my PCP early?

  • Are there any other costs I should know about?

  • Why do dealers offer PCP deals?

  • Will I be credit scored?

  • What happens to my credit rating (and the car) if I miss payments?

  • I've heard about gap insurance that'll protect me in case I write the car off. Do I need it?

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