When it comes to car finance products in the UK, the most popular option is known as a personal contract purchase, or PCP. As a matter of fact, this is the one that is pushed most by every car dealership and manufacturer. So, how does it actually work and what should you know about it?
For the past few years, this article has been very popular at The Car Expert, so it is only natural to give our guide to PCP a bit of an overhaul and update.
In the past, The Car Expert had looked at a variety of car finance options that are available. However, it has become clear that a lot of people are still not sure about PCP, even though a lot of them use it for financing a car purchase. Research dating back to 2015 shows that about 88% of men as well as 75% of women that were surveyed could not state the definition of PCP. If you happen to fall into that category, the good news is that you are not alone. To brush up on your car knowledge, we have a comprehensive glossary that you can explore simply by clicking this button:
Car Finance Glossary – Click Here
With most dealerships, a PCP will be offered by the finance company of the manufacturer. Offers are usually a lot better on a newer car versus a used car, simply because the manufacturer will be more interested in the sale of a new vehicle rather than one that was built several years ago. Some lenders will also offer PCPs, however they are not going to be quite as competitive in terms of manufacturer finance for new cars.
Personal Contact Finance – What Is It?
PCPs are a type of car finance that is based upon what is known as a Hire Purchase agreement, or HP. Instead of paying the whole value of the vehicle in monthly installments, you are basically paying off depreciation through your monthly installments with a PCP. When the term ends, you will still have a good amount that is outstanding, which is usually referred to as the balloon. There will be several options on how you can deal with the final amount, which depends on whether you would like to change your car or keep it.
With both a PCP and an HP, you are usually going to borrow the same amount and then pay similar interest. It will sometimes be a bit more on a PCP because of how the repayment is worked out. Fees will also be the same for a PCP and HP.
What is the attraction of PCP in terms of car financing, such as a hire purchase or a PCP in a vehicle showroom?
When you compare the two of these options, the major difference is that you will be paying off a lesser amount with your monthly payments. This will mean that you have a lower payment each month and a smaller initial deposit or possibly a shorter term for repayment.
PCPs will have a few great benefits for both dealers and manufacturers. Lower monthly payments will mean that more customers will be able to afford more vehicles. Final balloon payments at the end will usually mean that the customers will look for another vehicle on a PCP, which allows the dealer or manufacturer to secure a decent opportunity for repeat business.