In the bold and beautiful world of car sales, the PCP – or Personal Contract Purchase – deal is king of the hill. Some estimates say that as much as 80% of new car sales are now secured as PCPs. That’s a lot of cars.
But what is a PCP deal, what is all the fuss about, and what do you need to know before signing your name on that dotted line?
Here are 5 Essential Things You Need to Know about PCPs.
1: What is it?
A PCP is a form of Car Finance that allows you to buy a car in installments, with lower monthly payments than you might otherwise expect. It’s this low monthly charge that has made it by far the most popular way to buy a car today.
Like a Hire Purchase (HP) arrangement, a PCP involves paying a deposit, paying monthly installments over a period of a few years and driving away with the car you need.
Unlike a HP agreement, the lender or dealership doesn’t factor the entire cost of the car into these monthly payments. They calculate how much your car will be worth at the end of your agreement and set that cost to one side – this is called the “Balloon Payment”.
This means that you’re essentially paying off the depreciation of the car over that time rather than for the car itself.
At the end of your contract you can either
-
- Return the car.
- Pay the Balloon Payment in a single sum and own the car outright.
- Move onto a new PCP with a new car.
Sounds simple, right? Well it is. Sort of.
But there are things you need to know.
2: Pay The Biggest Deposit You Can.
This one is true of most Car Finance arrangements: the more you can stump-up at first, the lower your monthly repayments will be. This isn’t just because you’re paying a bigger chunk of the car up-front, it’s also because a big deposit gives your Lender or Dealership more confidence in your ability to repay your loan. THe more confident they are in this, the lower the fees and interest (the APR) they will charge you overall, saving you a chunk of change.
3: You’ll Need to Factor In the Balloon Payment
Whether this applies to you depends on whether you want to buy the car at the end of the repayment period. Most people don’t, choosing to move onto another car or drop the deal entirely.
Typically, only 20% of people on PCP contracts pay the Balloon Payment and secure the car.
If you really love the car and you want to buy it outright at the end of your 3 years, you’ll need to save up or talk to your bank.
The Balloon Payment is a single charge and it can be many thousands of pounds, especially if your car is expensive when new. Do you have that money set aside in savings? If not, try and scratch it together in good time.
4: A More Expensive Car Gets Lower Monthlies? What?!
This doesn’t always happen – this isn’t a hard and fast rule – but don’t be surprised if adding a few options actually brings your monthly payments down.
Sounds crazy, right?
Your monthly payments are partially calculated based on the post-depreciation cost of your vehicle. The more it’s still worth at the end of your contract, the more the Dealership or Lender can sell it for if you decide not to keep it.
This changes the calculation of your monthly costs and could actually decrease them if you go for a higher spec of car vs. a base model. This doesn’t always happen but it can.
So before you sign anything, ask your dealership to look at the monthly costs of a few different specs of car and see how they compare.
5: No Returned Deposit.
If you choose to end your deal without paying for the car or upgrading, you’re not getting your initial down payment back. There are no refunds.
If you want another car you’ll have to find a new deposit somewhere and you can’t use your car as collateral for it – not unless you buy it outright by paying the Balloon Payment.
Keep this in mind.
PCP’s are a brilliant way to pay for a car, even if you don’t choose to keep it at the end of your agreement. They’re flexible, affordable and you could get a great deal on your next car.
If you’d like to discuss your Car Finance options, have a word with our team at ChooseMyCar.com today.
Until next time, stay safe on the road.
