PCP drives new car deals
With predictions that March and the new 17 plate will be a record month for new car registrations, motoring editor ANDY RUSSELL looks at why PCP finance is a real driving force for sales
THIRTY YEARS ago people thought nothing of renting a TV and video recorder, or domestic appliances like washing machines and cookers, but bought a car.
Now, in a world of more disposable goods and, for many, less disposable income, many people would no longer consider actually owning a car, preferring the affordable flexibility of modern finance deals.
And there’s one product, personal contract purchase or PCP, that has cornered the market with private buyers and is helping to drive record registrations. But many people are still unsure what it is and how it works.
Few people can afford tens of thousands of pounds to buy a new car outright in one hit, but many can afford a few hundred pounds a month on finance. The way PCP works is to make that new car affordable and keep motorists’ options open at the end of the agreement.
PCP is similar to hire purchase (HP) but, instead of paying off the full cost of the car to own it outright at the end of the agreed period, with PCP you pay off only the depreciation, plus interest, in monthly instalments with an agreed annual mileage and time span. While it’s worth checking interest rates available from banks and independent financial brokers, manufacturers sometimes offer subsidised lower rates and a contribution towards any deposit.
The result is that, compared to HP, with a PCP you pay off a smaller amount of money which means lower monthly payments and deposit and shorter repayment term which makes it attractive to so many people.
At the end of a PCP, usually three years to tie in with most car warranties, there is an outstanding final value – the guaranteed minimum future value (GMFV), frequently referred to as the balloon.
At the start of the PCP agreement, the finance company predicts what the car will be worth at the end of the term – your deposit and monthly payments pay the difference between the buying price and that predicted value.
The GMFV is usually set low because, if the car’s market value turns out to be less than the outstanding amount, the finance company takes the loss so it means the car is often worth a bit more than predicted, more than covering what is owed, and any surplus can be used as a deposit for a PCP on another car.
At the end of the PCP you can: 1. Give the car back. 2. Part-exchange it against a new car – it doesn’t have to be with the same dealer or manufacturer – and start a new PCP. 3. Pay the final balloon payment to own the car outright.
If you choose to give it back, or part-exchange it, to avoid financial penalties, the car must:
Be within its agreed mileage, normally 6,000 to 10,000 miles a year. Have been serviced on time. Need no repairs beyond normal fair wear and tear.
PCP has proved a popular, cost-effective and flexible finance route for many private motorists who want to change their car every few years and don’t do high mileage, and is playing a big part in driving the UK’s record sales.