PCP stands for Personal Contract Purchase, and a PCP agreement deals with the usage of a particular vehicle.

Under a PCP contract, the person is allowed the use of a specific car and pays a certain amount every month, as described in the contract. At the end of the contract, the person can either keep the car by paying a certain amount (the optional final payment) or return it.

This method of car purchase has become very popular in many countries. Many big car manufacturing companies like Ford, Nissan, BMW, and VW have developed methods to make PCP deals affordable.

1. Payment Structure in a PCP Deal

There are three main payment parts in a PCP deal-

1.1. Initial Deposit

It is the initial payment that the user is willing to pay. The more the user is willing to pay, the less the monthly instalments will be.

1.2. Monthly Deposits

Some monthly amounts are deposited by the user as stated in the contract. The monthly deposit amount depends on the amount of the initial deposit.

Monthly Deposits Offer Affordability

Scott Distasio, Accident and Injury Lawyer, Distasio Law Firm, explains how the monthly deposits and the optional final payment contribute to the flexibility or constraints of a personal contract purchase (PCP) agreement:

“In a Personal Contract Purchase (PCP) agreement, the monthly deposits and optional final payment play a crucial role in providing flexibility while also imposing certain constraints.

The monthly deposits, typically lower than traditional financing options, offer immediate affordability and budgeting ease. This flexibility allows individuals to drive newer or higher-spec cars than they might otherwise afford.

However, the optional final payment, or balloon payment, can be a double-edged sword. While it provides the option to own the car at the end of the term, it can also be a significant lump sum.

This necessitates forward financial planning, as failure to settle this amount means either returning the vehicle or refinancing the balloon payment, which could extend financial commitments.”

1.3. Final Payment

When the contracts end, the user can either keep the vehicle by paying a certain amount called a “Balloon Payment” or return it.

This final payment is decided by the finance company. It is the estimated value of the car at that time. This value is called Guaranteed Minimum Future Value (GMFV).

In addition, if a user returns the car, they may have to pay extra for damage or excess mileage.

2. Advantages of a PCP Agreement 

A PCP deal can be beneficial in many ways.

For example, if someone wants to use a car that is too expensive, they can easily go for the PCP option, which offers affordable monthly instalments. However, one must be mindful of the total cost of financing, including the large optional final payment and extra charges if the mileage is exceeded. 

Additionally, the user can choose between a new vehicle or a used car, and the finance company will draft the agreement accordingly. 

Besides this, sometimes, when a manufacturing company wants to promote or boost its model purchase, it offers a good manufacturing discount to the user. Customers might also get additional discounts if they have a high credit score. 

The customer also has the right to cancel the contract at any time without worrying about the depreciation value of the vehicle. 

3. Disadvantages of a PCP Agreement

A PCP agreement is not always beneficial for the customer. When the credit score of a customer is low, they might be charged a high-interest rate.

Also, the car’s ownership is not legally in the hands of the person.

In a few cases, the “Baloon Payment” is very expensive. The amount of money to be paid as the “Baloon Payment” can be affected due to certain reasons like early cancellation of the agreement by the customer can lead to increased final payment. 

Moreover, there are fixed mileages for each vehicle. If one exceeds this, then some additional payments need to be made. Also, there might be chances that one is struck in a full-time contract.

Additional penalty charges also need to be paid if the car is damaged in any way. 

Evaluate Total PCP Costs

Abid Salahi, Co-Founder/CEO of FinlyWealth, elaborates on factors that users should be mindful of to ensure they fully benefit from the flexibility and options PCP offers:

“Handling a Personal Contract Purchase (PCP) deal requires clarity on a few fronts from users.

They need to remember it’s not just the monthly payments but also the interest rates and possible charges for breach of the mileage cap that make up the balance.

Trading cars frequently? PCP serves perfectly. But if it’s for the long term, evaluate alternatives too. The final [piece of] advice: Always analyze the ‘option to purchase’ price—this is the deal-breaker in some PCPs. The golden rule: Always be vigilant.”

4. Other Alternatives to PCP

Apart from financing a car through PCP, there are other options available as well. 

4.1. Hire Purchase (HP)

Hire Purchase is especially for people who want to own a vehicle but do not have the total amount at the time. 

This is a credit agreement in which a person selects a particular car that they want to own. The customer then pays the initial amount and agrees to pay a monthly amount every month until the price of the car is delivered. 

The customer gains complete ownership of the car once the payment is completed. 

4.2. Personal Car Loans

A personalized car loan is also affordable for those who want to buy a car or vehicle.

One takes the loan from the bank and then returns the amount to the bank in monthly instalments with interest.

4.3. Personal Contract Hire (PCH)

Personal Contract Hire is for people who want to use a car but do not want the ownership of the same. Just like the PCP deal, one pays a monthly deposit.

The only difference is that one must return the vehicle at the end of the agreement. There is no option for “Balloon Payment”. 

5. Is PCP a Waste of Money? 

As discussed earlier, a PCP deal has many advantages and disadvantages. You might seem to get confused after going through so many points, but let’s break it down. 

A good PCP agreement is beneficial and affordable for the customer. It completely depends on how the agreement is drafted. The terms and conditions of the agreement play a major role in deciding whether the deal is beneficial or not. The priorities of the customer should also be considered while drafting a PCP deal. 

For people who are confused about buying a car, this can be the best deal. They can use the car under a contract and decide whether they want to keep it or not. But one has to be mindful of the terms and conditions to make this deal beneficial. 

Guest Author: Saket Kumar

Last Updated on February 10, 2024 by Saket