PERSONAL Contract Plans (PCPs) are now a very popular way of financing your new car - but they continue to cause confusion among buyers.
That is especially the case around a couple of key concepts.
The first is ‘future guaranteed minimum value’. This is the amount the car will be valued at after (usually) three years, provided you’ve met all the undertakings on mileage, wear-and-tear etc. But it is NOT your car or money. You will have to pay that amount to own the car if you wish. It is the amount outstanding on the vehicle.
Call it a balloon payment if you like, but it is NOT your money and you can’t use it as a trade-in value against a new car. Some people think you can.
The second one is equity. This is the difference, if any, between what the car is worth on the market and the aforementioned guaranteed minimum value.
So if the car has a €20,000 minimum value and the market shows (you can shop around) it is worth €24,000, you are €4,000 to the good. That is €4,000 worth of equity you can put towards a deposit for your next deal.
The ideal PCP is where you switch to a new deal paying the same amount each month for a new car. It doesn’t always work out that way.
It is important that you get down and dirty with the facts and figures of doing a PCP a second time round especially. That’s when there seems to be the potential for misunderstanding and disappointment.
Don’t forget, many people often go into the first PCP deal with a trade-in or deposit/cash up front. Quite often, they can go into the second deal having to find money to top up their deposit. That is when the real world of PCP can hit home with a vengeance if your first deal has not been structured to suit you.
PCPs are an amalgam of balancing acts. If you have a large deposit first time around and your repayments are lower as a result, you could find the second time around, without a big deposit, that you are facing a steep increase in monthly repayments.
For all that, and in the main, PCPs appear to be going well and the major motoring financiers all report substantial levels of lending and satisfaction.
But it’s no harm to be sure of what is involved.