Personal contract plans if you’re buying a car – pros and cons of PCP deals

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Personal contract plans (PCP) are a popular way of buying a new car. What how do PCP deals work? Read on to find out about personal contract plans if you’re buying a car.

Personal contract plans if you’re buying a car

Most new cars are bought with a personal contract plan. In fact, figures from the car industry show that over three quarters of new cars purchased in 2015 were bought with personal contract plans. So how do personal contract plans work? Here are the basic steps:

  1. You choose the car you want.
  2. You agree with the car dealer how long you want the finance deal to last for.
  3. You decide on a mileage allowance/agreement or cap (various terms are used). This is the maximum number of miles you’re allowed to do each year while you’re making payments under the finance deals. If you do more miles than you’ve agreed under your mileage allowance, you may have to pay an excess mileage charge.

SAVVY TIP: You should be able to increase the number of miles under your mileage allowance, if you need to. You can normally do this by contacting the finance provider. There may be a charge (for example, VW Financial Services charge £60 to amend the agreement).

  1. The finance provider (normally linked to the car manufacturer) sets the guaranteed minimum future value (GMFV) of the vehicle. This is the amount the finance provider guarantees to pay if you want to hand in your car or trade it in on a new PCP deal. It depends in part on the number of miles you’ve done.

SAVVY TIP: Car magazines say that the finance company will often set the GMFV quite low. That’s because if the car is worth less than this they have to absorb the loss. The higher the GMFV the more likely they are to make a loss.

  1. You pay a deposit. The deposit varies and will depend on how long you want the finance deal to last for and the mileage allowance. It’s typically around 10% of the purchase price.
  2. You make monthly payments for as long as your PCP deals lasts. These deals typically last for between two and four years. When the PCP deal ends you’ve normally paid off about a third of the price of the car.
  3. At the end of the term you have three options. You can hand back the car, in which case there’s no extra money to pay. Alternatively, you can use the value of your car towards buying a new car on another PCP deal. If your car is worth more than the guaranteed minimum future value, you’re normally given a discount off the value of the car you want to buy. The third option is to make a final payment (called a ‘balloon payment’) so you can keep the car. It’s normally several thousand pounds and can be much more, depending on the original price of the car and the guaranteed minimum future value agreed at the outset.

SAVVY TIP: If you want to buy another car, you don’t have to buy it from the same dealer or manufacturer, but many people do. It’s one reason why dealers love them so much – they’re guaranteed repeat business.

Pros and cons of PCP deals

PCP deals can work for some people, although personally I’m not a fan of them. Here are some of the main pros and cons.

Pros:

  1. You don’t normally have to come up with a large deposit.
  2. The monthly payments are relatively low compared to what you’d pay if you had a personal loan. This means you can drive a newer or better car (or both) than you’d otherwise be able to have.
  3. You have flexibility about what you do at the end of the agreement.
  4. Maintenance and servicing can be included.
  5. You know the minimum your car is guaranteed to be worth if you want to trade it in on a new PCP deal.

Cons:

  1. You don’t own the car until you make the final – much larger – payment. If you can’t afford this, you can’t keep the car.

SAVVY TIP: If you’ve paid at least 50% of the total amount you were due to pay under a PCP deal (that means the amount you borrowed, plus the interest and any charges), you have the legal right under the Consumer Credit Act 1974 to hand back the car and make no further payments. It won’t affect your credit rating if you do this because you’re not defaulting on the credit agreement, you’re just exercising your legal right. This should be included in your PCP deal paperwork.

2. You may have to pay extra charges if you go over the mileage allowance. It’s normally a certain amount per mile.

3. You must have fully comprehensive insurance.

4. You normally have to have the car serviced every year at one of the manufacturer’s approved dealers. You can’t use a cheaper independent garage. However, this may be included (see above).

5. If you trade up every time your PCP deal comes to an end, you’re constantly in debt.

6. If the car is damaged or not in good condition at the end of the term, there may be a deduction from the guaranteed minimum future value.

Related articles:

Car tax from April 2017

New child car seat rules – and what it means for booster seats

Paying off a loan early; check the paperwork as you may be able to make extra payments

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