Buying a car? Everything you need to know about PCPs
When buying a house we’d never leave the mortgage part to the last minute- so why would we do this for any other type of loan?
When it comes to car loans, it seems a lot of us do. Research from the Competition and Consumer Protection Commission (CCPC) found that on average people spend nearly 17 hours researching and viewing cars, but just 3.8 hours looking at finance options. This means we spend almost 4½ times longer selecting the car, compared to thinking about how to pay for it.
This could be down to the fact that the world of finance is rife with jargon- and let’s face it, it isn’t the most compelling of subjects. Car finance can be particularly tricky so it’s vital you know your stuff when it comes to paying for a new car before even setting foot in a garage. To get your head around a Personal Contract Plan (PCP), an increasingly popular way to afford a new car, we’ve put together this handy guide so you know exactly what’s involved.
What is a PCP?
A PCP typically lasts 36 months and involves an initial deposit, followed by a series of relatively low monthly repayments and a substantial final payment known as the Guaranteed Minimum Future Value (GMFV). You pay this at the end if you want to buy out the car. If you don’t want to pay the GMFV, you can hand the car back or enter into a new PCP for a new car -but you may need money for your next deposit.
Here’s the breakdown
Pay a deposit, usually between 10-30% of the car’s retail value. You can pay by cash, or, if you already own a car, you may be able to trade it in and use part or all of the value towards the deposit.
What exactly is the GMFV?
The GMFV is the final lump-sum you pay if you want to own the car at the end of your PCP agreement. This GMFV is set at the beginning of the contract. If you are entering into another PCP, the GMFV is subject to you meeting all the terms and conditions, including mileage restrictions and wear and tear conditions you agreed to at the start.
The lender sets the GMFV lower than what they think your car will actually be worth at the end of your PCP to hopefully give you some equity at the end of your contract. But, this equity is not guaranteed and will depend on the actual market value of the car at the end of the contract. Any equity can be used if you want to enter into another PCP, which is one of your options after your PCP ends. But, if the market value of second-hand cars happens to drop during the term of your PCP, or if the wear and tear on the car is excessive or you exceeded the agreed annual mileage, you may not have any equity. In any event, you may not have enough equity to cover the deposit on a new PCP, so you would need to come up with a new cash deposit funded from your own savings or another source to enter into another PCP.
What happens at the end of the PCP?
You have three options at the end of your PCP.
1. You can pay the GMFV, or final lump-sum, and own the car after your PCP ends.
2. You can enter into a new PCP for a different car and it’s the option most people choose. As already mentioned, the amount of equity you have to use as a deposit towards a new car will largely depend on the value and condition of your car at the time - so this is not guaranteed.
3. You can hand the car back and not owe any more, as long as you have made all your repayments as agreed. However, there can be penalties if you have exceeded mileage restrictions or the car has excessive wear and tear. These terms and conditions will be in your original PCP agreement.
The pros and cons
PCPs have small initial deposits and relatively low monthly repayments, with many car brands offering low or 0% interest rates.
You have options at the end of the contract, and can hand it back without paying the large lump sum (subject to agreed terms and conditions).
A PCP is a good way to drive a new car for three years - but not necessarily own one.
If you want to own the car outright, it’s vital you think about how you’ll pay the final-lump sum. Unless you are able to pay the lump sum, you are really only hiring the car for the 36 months.
If you run into financial difficulty during the term of your PCP and want to sell the car you’ll need the agreement of the lender to do so (as they are the legal owner).
Any equity you think you might have at the end of the contract is not guaranteed and will be effected by future car values, the condition of the car at the end of the contract and whether you have met mileage conditions.
To find our more about PCPs, click here.