WHAT EXACTLY IS A PCP?
If you’re used to paying for your mobile phone monthly then the notion of buying a new bike in the same way, save for a few key differences, will be familiar ground…
What does PCP mean?
Personal Contract Purchase (PCP) is a finance plan that sets out to offer the lowest possible monthly repayment amount – a lot lower than traditional hire purchase.
How does it work?
There are four key financial elements to buying a bike on any PCP deal: deposit, monthly payment, mileage and the final payment. To keep things simple, with this guide, we have gone for a deposit of £2000 and an annual mileage of 5000. In some cases this one-size-fits all approach doesn’t work as well as it should and so we have adjusted the deposit where necessary, and stated clearly we have done so. When it comes to the end of the PCP deal, usually 36 months, you then have the final payment to deal with. There are three choices here: you pay it and keep the bike, you hand the bike back, take a new bike and carry on in Pcp-land, or you hand the bike back and walk away. Think of it as having rented a bike for three years.
Those monthly payments look low…
The main attraction of a PCP deal is the low monthly payment. The finance companies can do this because the bike will still have a value at the end of the PCP. This is called the Guaranteed Future Value (GFV). On a 36 month deal the GFV will probably be 4060% of the new price. This is fixed when you sign up to your PCP.
It works like this…
Say you are buying a new bike that costs £10,000, a nice round number. You put down a £2000 deposit, which leaves £8000 to finance. However, the GFV of your new bike is £5000, which means your monthly payments only have to cover the difference between £8000 and £5000, plus what interest there is. This is why PCP monthly payments are so remarkably low.
Who owns the bike during the life of the PCP?
As we have already said, at the end of the PCP term you can either sign up to another new bike, hand the bike back, or stump up the final payment and keep the bike. While you are making payments, however, the bike remains the property of the finance company. Crucially, when you sign up to a PCP you are agreeing to maintaining the bike as a clean, resaleable asset. If you return the bike at the end of the life of the PCP and it’s an unserviced, rusty and filthy hulk you will incur extras costs.