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

EDP Norfolk - - Motoring -

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.

Above: PCP fi­nance deals are be­com­ing in­creasinl­gly pop­u­lar with mo­torists

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