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Personal Contract Purchase

Personal Contract Purchase (PCP) offers a flexible and cost-effective way to finance your next vehicle. Here. we’ll explore how PCP works, its key benefits, and what to consider before entering into an agreement. 

What is Personal Contract Purchase?

PCP is a type of finance agreement that allows you to spread the cost of a vehicle over time, without paying off its full value over the term. The agreement includes a deferred balloon payment, or Optional Final Payment (OFP), which you can choose to pay at the end to take full ownership of the vehicle. This approach offers flexibility and often results in lower monthly payments compared to other finance options. 

How Does Personal Contract Purchase Work?

A PCP agreement involves three main elements:
  1. Deposit: You’ll typically pay an upfront deposit, often around 10% of the vehicle’s value. A larger deposit can reduce your monthly payments.
  2. Borrowed Amount: You then repay the difference between the vehicle’s initial value and its expected value at the end of the agreement (known as the Guaranteed Minimum Future Value). This amount is spread over the term of the agreement, typically 2 to 3 years.
  3. Optional Final Payment (OFP): At the end of the term, you have the option to pay the balloon payment, which reflects the vehicle’s predicted value, to take ownership. 
Personal Contract Purchase (PCP) infographic

End-of-Term Options

At the end of your PCP agreement, you have three options:

  • Keep the Vehicle: You can pay the balloon payment and take ownership of the vehicle. If the payment is too large to cover in one go, refinancing options may be available. 
  • Return the Vehicle: If you no longer wish to keep the vehicle, you can return it, provided it’s within the agreed mileage and in good condition.  
  • Part-Exchange: If the vehicle’s value exceeds the balloon payment, you can use the equity towards a deposit on a new vehicle or finance deal. 

Be mindful of mileage limits in a PCP agreement – exceeding these can incur extra charges.

The Benefits of PCP

  • Flexibility

    With options to keep, return, or part-exchange the vehicle PCP offers a level of flexibility that caters to changing needs.

  • Lower Monthly Payments

    Monthly payments under PCP are usually lower than other finance options like Hire Purchase, allowing you to drive a more expensive vehicle with manageable payments.

  • Guaranteed Minimum Future Value

    The balloon payment is fixed at the start of the contract, protecting you from the risk of depreciation.

  • Access to Higher-End Vehicles

    PCP often allows you to afford more luxurious or higher-specification cars while keeping payments within budget.

Considerations of PCP

  • Mileage Restrictions

    Going over the agreed mileage can result in additional charges, so choose a limit that reflects your driving habits.

  • Condition Requirements

    The vehicle's value at the end of the agreement assumes it's in good condition. Excessive wear and tear can lead to extra costs.

  • Deferred Ownership

    You won't own the vehicle until you make the balloon payment, so if long-term ownership is your goal, this deferred payment should be planned for.

PCP is an attractive option for those looking to drive a high-end vehicle with lower monthly payments, while also offering the flexibility of multiple end-of-term options. However understanding the agreement’s terms, including mileage limits and the balloon payment is essential to ensuring it aligns with your financial goals. 

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