PCPs can be an attractive and convenient way to finance your next car purchase but a bank loan may be cheaper and more flexible
What is a Personal Contract Plan or PCP?
PCPs are a form of car finance based on a hire purchase (HP) agreement. Unlike standard HP or a bank loan, the repayments are typically lower, as you are paying off the depreciation of the car and not its entire value. The non-refundable deposit is typically 10pc to 30pc of the value of the car and can be paid in cash, or if you already own a car, you can trade this in for part or all of the deposit, depending on its value.
What is the guaranteed minimum future value (GMFV)?
The guaranteed minimum future value (GMFV) represents what the car will be worth at the end of the contract.
What are my options at the end of a PCP contract?
At the end of your PCP agreement you have three options. First, you can hand back the car at no extra cost subject to the agreed terms and conditions, but if your car does not meet the conditions, there will be financial penalties. Second, you can start a new PCP deal and use any equity in the existing car. So, for example, if the GMFV is €9,400, but the car is actually worth €10,600, you have €1,200 in equity to use on another PCP deposit. Third, you can pay off the GMFV, a lump-sum payment, at the end of your contract, to buy the car.
What are the benefits of a PCP plan?
On a PCP the monthly repayments are a lot smaller than on a standard loan, as you are not paying off the full value of the car; rather, the repayments are calculated by deducting the deposit and GMFV from the selling price so it’s this amount plus interest that determines what you pay.
What are the risks?
Generally, if you’re intending to own the car at the end of the contract then PCP is not ideal as you’ll need to pay a large final balloon payment (GMFV) at the end of the contract. You’d be better off with a bank or credit union loan and to spread the repayments over a couple of years instead. Under PCP, if you miss repayments the finance provider can and will take the car off you. Or if you cancel your contract and return the car you’ll probably have to pay a large fee. It’s your responsibility to service the car regularly and to stay within agreed annual mileage.
Top tip: Always compare loans and finance by annual percentage rate (APR) as this essentially is the real cost of borrowing money as it includes interest and charges. The lower the APR then the better the finance deal.