Definitive guide to PCP deals
Hire drive is a popular way to stretch a budget but there are some things to bear in mind
Published 24/01/2016 | 02:30
Car sales are booming, with almost 125,000 new registrations in 2015, up more than 30pc on 2014, according to figures from the SIMI. Sales so far for this month show similar increases and 2016 is set to be the third consecutive year of growth.
The depressed car market of the past few years has reduced the supply of good second-hand cars, so when you add in the competitive finance deals it's little wonder so many are opting to buy a new car.
One of the most popular ways to finance a new car is through a Personal Contract Plan - but what exactly is a PCP and how does it work?
PCPs are a form of hire purchase agreement without the balloon payment at the end. Instead of buying a car you effectively hire it and at the end of the agreed term, you hand it back. You pay a deposit (usually by way of trading in your old car) ranging from as low as 10pc to as high as 30pc. The company then works out the car's likely value at the end of the contract, known as the Guaranteed Future Value (GFV).
The amount you repay over the term of the contract is the difference between the price of the car and its guaranteed future value. This is the reason the repayments are lower than on other forms of finance, as you are essentially renting the car - what you are paying for monthly is the amount based on what the car is predicted to lose over the course of the contract, rather than the car's total price, plus some interest.
The guaranteed future value is based on a number of conditions, including mileage and condition, so you need to pay close attention to the small print.
Most PCPs come with mileage restrictions and a penalty for exceeding the limit, so you will have to agree an annual mileage as part of any PCP deal.
It's important to get this right, as you'll be charged extra for every kilometre you go over the limit, but if you overestimate you will end up paying more for your car than you need to.
VW, for example, charges excess mileage of 6c per kilometre, so you would have to stump up €300 if you ran over by 5,000 kms. You can also be charged if you don't keep the car in good condition. Some firms even insist on a regular service, often at the dealership.
When your PCP comes to an end (usually after three or four years) you have three choices. You can simply return the car and move on; pay the final, pre-arranged fee and own the car outright; or trade in the car and, if it's worth more than it was predicted to be, put the difference towards a new PCP.
Finally it is important to remember your car remains the property of the finance house and can technically be taken from you and sold to pay off the loan if you default on your payments.
Here are some examples of a PCP over a three-year term:
Nissan Micra 1.2
On-the-road price: €15,395.
Finance rate: 7.9pc APR.
Deposit: €1,540 (10pc).
Monthly repayments: €272.07.
Cost of finance: €2,517.52.
At the end of the three years, the outstanding balance due on the car will be €6,578.
VW Golf Highline
1.6 litre diesel
On-the-road price: €28,330.
Finance rate: 1.9pc APR.
Deposit: €5,666 (20pc).
Monthly repayments: €365.95.
Cost of finance: €960.20.
At the end of the three years the outstanding balance due on the car will be €10,330.
Kia Cee'd 1.4 Petrol
On-the-road price: €19,650.00.
Finance rate: 5.9pc APR.
Deposit: €5,895 (30pc).
Monthly repayments: €240.29.
Cost of finance: €1,836.43.
At the end of the three years, the outstanding balance due on the car will be €6,877.50.
BMW 520d SE Saloon
On-the-road price: €47,060.
Finance rate: 3.9pc APR.
Deposit: €14,110.50 (30pc).
Monthly repayments: €416.
Cost of finance: €3,195.29.
At the end of the three years, the outstanding balance due on the car will be €21,093.79.
Toyota Avensis D-4D 112 (1.6) Luna
On-the-road price: €30,450.
Finance rate: 5.9pc APR.
Deposit: €6,090 (20pc).
Monthly repayments: €434.76.
Cost of finance: €3,230.35.
At the end of the three years, the outstanding balance due on the car will be €11,875.50.
Renault Kadjar Expression+ ENERGY TCe 130
On-the-road price: €24,990.
Finance rate: 6.9pc APR.
Deposit: €8,359 (30pc).
Monthly repayments: €249.
Cost of finance: €2,779.
At the end of the three years, the outstanding balance due will be €10,296.
Pros: Use of a new car every three years. Lower monthly payments. Low deposit (ranges from 10 - 30pc).Flexible repayment terms (from 12 to 36 months). A choice of what to do at the end of the repayment term
Cons: Depending on the mileage and condition, you may face penalty charges. The total amount paid may be more than with hire purchase. You have to pay the outstanding balance if you want to keep the car.