What is a PCP?
An increasingly popular way to finance a new car is under a Personal Contract Plan (PCP). But what exactly is a PCP and who is it best suited to, asks Geraldine Herbert
PCPs are a form of car finance based on a hire purchase (HP) agreement.
What is a PCP?
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. At the end of the agreement you have the choice of whether to make that final payment to own the car or not.
The deposit is typically between 10pc and 30pc of the value of the car, depending on the finance provider. Your deposit 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. PCP agreements are usually made for terms of between three and five years.
A guaranteed minimum future value (GMFV) represents what the car will be worth once the PCP ends and this, plus the deposit you choose to put down, is taken away from the total cost of the car, and you make monthly payments (plus interest) on the remaining balance for the term of the contract.
What to consider?
PCP adverts on the radio or newspapers e.g. drive away in a new car for €200 a month, are typically based on a 30pc deposit.
If you compare financing the same car on a PCP to another loan, the big difference is that you are paying off a much smaller amount of money.
Also if your car is worth more than the GMFV, you will have built up some equity towards your next deposit and you can change your car for a new one every few years without the hassle of having to sell it.
Generally, if you are intending to own the car at the end of the contract then PCP is not the ideal form of finance as you will need to pay a large final balloon payment (the GMFV) at the end of the contract period.
Also if you miss payments 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 significant fee. It is your responsibility to service the car regularly and to stay within the agreed annual mileage.