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  4. Car Finance Glossary
  5. Personal Contract Purchases

Personal Contract Purchases (PCP)

Personal Contract Purchase is a new alternative to hire purchase loans. The car is leased by the individual from the dealer after paying an initial deposit. PCP is a popular way of financing cars as it is very flexible and allows you to upgrade cars frequently, if you wish. Because you defer part of the loan payment to the end, the monthly payments can be lower as you are only paying for the depreciation of the car.

The payment is split into three part:

  1. An initial deposit, this may be just the first month's payment. PCP finance is flexible on the deposit required, depending on your dealer.
  2. Monthly payments
  3. Balloon payments (optional if you want to own the car at the end of the finance agreement.) . This could be 30% to 40% of the cost of the car new, i.e. several thousand pounds.

PCP lets you drive a high specification car for lower monthly payments than other finance options. This is because you defer a percentage of the total cost of the vehicle to the end of the contract. This percentage is known as the Minimum Guaranteed Future Value (MGFV) and is the key difference between PCP and traditional forms of financing.

The MGFV plus your deposit is subtracted from the selling price of the vehicle and your monthly payments are based on the balance (plus interest on the balance and the MGFV). Effectively, you will make lower payments than traditional financing simply because you are only funding the depreciation.

At the end of the contract you have 3 options:

  1. Give the car back
    If the car is in good condition and has not exceeded the agreed mileage you can simply return it to the dealer without paying anything extra. If the car is worth less than the MGFV the finance company can not ask you for the difference as they guaranteed this future value and they will absorb the loss.
  2. Pay off the outstanding MGFV to own the car
    If you want to keep the car, you need to pay off the balloon payment before the car becomes yours. If your car is worth more than the MGFV, you can sell the vehicle privately and keep any profit over and above the MGFV.
  3. Part exchange the car with a motor dealer for your next new car
    If your car is worth more than the MGFV, you can use this as a deposit on the new agreement.

There are a couple of things you need to bear in mind, which affect your agreement: the mileage and the wear and tear on the car.

Excess Mileage
At the beginning of the agreement, you decide on the total mileage you expect to do. If, at the end of the agreement, having chosen to hand your vehicle back to the finance company, your mileage exceeds the agreed level, you simply pay a fixed amount for every extra mile.

Wear & Tear
It is in your interest to minimise the vehicle's 'wear and tear' and not exceed the agreed mileage. When the agreement has finished, the vehicle may well be worth more than the MGFV, providing you with extra value. In simple terms 'normal wear and tear' means that for its age and mileage, the vehicle is in fair working order, condition and repair. A detailed guide will be provided to you by the finance company at the start of your agreement.

Other services
You can optionally pay for additional facilities such as servicing costs to be included. These may work out cheaper than paying for them yourself. Always check how much this will cost and read the fine print for exclusions.

PCP for business
If you are a company car driver opting out of the company car scheme (Cash for Car) PCP is a good finance option. You can claim your monthly PCP payments as your company car allowance or mileage allowance and avoid paying excessive company car taxes.