If you’re looking to get a car on finance, you may be considering a PCP deal to help spread the cost. There are many misconceptions that surround Personal Contract Purchase deals and the sort of customers they can be beneficial too. Before you sign on the dotted line for any type of car finance deal, it’s best that you do your research first. The guide below has been designed to help you figure out whether PCP deals are right for you. We look at how PCP car loans work, the benefits of getting a vehicle and also what you should consider before taking out a PCP deal.
How does personal contract purchase work?
Personal Contract Purchase or PCP is a type of car finance agreement which allows you to get a new or used car. PCP is a type of hire purchase deal but unlike HP, you don’t spread the full cost of the car you want. Instead, you pay the difference between how much the car is worth at the start of the agreement and how much the car will be worth at the end of your agreement. This means at the end of your agreement, there tend to be a large balloon payment to pay if you want to keep the car. Alternatively, if you don’t want to keep the car at the end of the agreement, you can choose to hand the car back to the dealer or use the value towards another car on a new PCP deal.
Benefits of getting a car through PCP:
For many drivers, getting a car through PCP is a no brainer. You can get the car you want and pay for it in low monthly payments and don’t have to own the car if you don’t want to, but there are many other benefits too. Let’s take a look.
Lower monthly payments
Due to the structure of PCP agreements, you can usually benefit from lower monthly payments than other options. This is because you are only paying off the value that the car loses whilst you drive it, also known as the depreciation. You can also benefit from low interest rates when you shop around, and some new cars can come with 0% finance too.
You don’t have to own the car
PCP deals are a flexible way to drive the car you want but not be tied to it. Most people choose to hand their car back at the end of their PCP agreement due to the large balloon payment. However, there are also options to refinance a balloon payment too if you did wish to keep the car but can’t afford to pay it outright.
Get a newer car than you thought
For many people, PCP enables them to buy a better car than they would with cash. This can mean you get a better, more reliable car than if you were to buy second hand. PCP can also be used to finance both new and used cars from a dealer or car finance broker. Used cars tend to have lower monthly payments thanks to their lower purchase price but new cars can benefit from better technology and less miles on the clock.
Flexible terms
Within PCP agreements, you don’t need to put down a deposit but putting more in can make your monthly payments cheaper. You can also finance a car through PCP over 2-5 years so you can choose a term that’s right for you. The longer you take to pay off your finance, the lower your payments will be. However, you may pay more in interest in the long run.
Things to consider before you take out a PCP deal:
As mentioned above, PCP deals can suit a whole range of different drivers. However, there are a few factors you should consider first.
Mileage limitations
Most people choose to hand the car back at the end of their PCP agreement. Due to this, you will be required to set a mileage limit at the start of the agreement. If you exceed your stated mileage limit, you can be required to pay mileage charges. You can also incur damage charges if you hand the car back in a state which goes beyond general wear and tear.
Less options for bad credit
Low interest rates on PCP deals can be reserved for people with good credit scores, this is because they are less of a risk to lend to. Missed or late payments and high levels of debt can negatively affect your credit score and affect your chances of approval. If you’re not sure if you’d get approved, you could first use a free car finance calculator to see how much you could borrow based on your credit score and monthly budget before you apply. Alternatively, if you have bad credit, you could be better suited to a car finance agreement such as hire purchase.
Ending your agreement early can be costly
If you want to end your car finance agreement early, you’ll need to have paid 50% of your agreement off before its possible. This amount will include the balloon payment and any other fees so it can be costly. If you need to cancel your PCP agreement early, it’s worth knowing if you can pay the difference first. Alternatively, after the 50% mark, you won’t get any of the extra you have paid if you want to cancel early.
