Personal Contract Purchase PCP
Personal Contract Purchase (PCP) is becoming a very popular alternative to Hire Purchase (HP). You will not own the car throughout the finance duration until you make a lump sum payment at the end. However, this gives you the opportunity to change your car on a more regular basis. PCP is very similar to HP, but the rate at which you borrow is typically at a lower rate as it is based on the value it holds at the start of the agreement minus the value it holds at the end of the agreement. The monthly payments on PCP finance are usually calculated by the miles that you travel per year and also the length of the agreement. The more miles that you do, the more likely the valuation the vehicle will depreciate. The Guaranteed Minimum Future Valuation (GMFV) is an estimate of the value of the car at the end of the agreement.
A staggering 80 per cent of all new and used cars sold on finance are purchased using this method. It's also the preferred finance method of dealers and car manufacturers. As you’re paying for the depreciation value of the car and not to own it, payments are likely to be lower than with Hire Purchase.
You have three options at the end of your PCP term
- Take the car back to the dealer and walk away with nothing to pay, subject to any damage on the car and any mileage above the stated mileage at the start of the agreement.
- Trade the car in for a new one – Use any value above the GMFV amount as a deposit towards a new car. For example, if the GMFV is £7,000 and the car is worth £8,000 at the end of the contract, you’ll have £1,000 deposit to put towards your new car.
- Pay the GMFV and own the car outright – Paying the GMFV activates a transfer of ownership and the car becomes yours. However, the GMFV will can total many thousands of pounds, so you may prefer to refinance the car.
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