To PCP or not to PCP – that is the question...

QI AM buying a new car next month and will be borrowing. Personal Contract Plans (PCPs) seem to be all the rage these last few years but I don’t really understand them. Is it the best way to borrow or would you advise using a bank or credit union? I have an Audi A3 to trade in. It should be 50% of the total cost so the borrowings won’t be a burden. DAVID – Dundalk, Co. Louth

APCPs are a flexible form of hire purchase contracts. They differ from traditional hire purchase (HP) agreements in that you are not committed to buying the car at the end of the term. But unlike conventional leasing, equity is built up during the HP period. It can, however, evolve into a never-ending loan – something I would not recommend. The PCP buyer has to put down a deposit of up to 30% of the value of the new car and then agree a monthly repayment plan. This covers the cost of the car plus interest and depreciation.

The car will be given a guaranteed Guaranteed Minimum Future Value (GMFV) – enough to pay off the outstanding lump sum at the end.

There are three ways to end a PCP: 1. Hand back the keys at the end of the term and walk away with no further payments. 2. Buy the car from your dealer by paying off the lump sum required. 3. Swap for a new car and start a new PCP. If you opt for a new PCP, you don’t own the vehicle so all you have towards the deposit on your next PCP car is the equity (outstanding value) built up in your vehicle during the loan term.

If you can afford the 50% full capital repayment over a three-year term with your bank or credit union, you would be better off. The latter have exceptional car loan interest rates. Happy motoring, David!