Personal Contract Purchase (PCP) is the name for a type of car finance agreement that is available for customers with a good credit rating, who are looking to buy a new or nearly new car. We explain exactly what PCP is and how it works in the following guide, along with providing lots of handy resources to help you understand it even further.
Personal Contract Purchase is classed as a finance product, but actually works more like a leasing product as you do not take ownership of the vehicle until you have paid a balloon payment. As it’s a finance product, you can class the agreement as a loan and therefore interest is charged on the monthly rentals. The monthly rentals will be worked out by calculating the difference between the purchase price and a guaranteed future value.
The guaranteed future value is the amount that the leasing company estimates the car will be worth at the end of the finance period. To work out this price, the leasing company will take into consideration the type of car (brand, desirability and ability to hold its value) and the agreed annual mileage.
When you take out a personal contract purchase agreement, you will agree to an annual mileage limit. If you exceed the annual mileage limit, you will have to pay additional fees for every mile that you travel over the agreed limit. The fee tends to be small, only a few pence per mile. However, this can start to add up if you go well over the limit.
The leasing company remains the legal owner of the car during a personal contract purchase agreement. This will only change once you have paid the final balloon payment, which as previously mentioned, will be the guaranteed future value of the vehicle. The name personal contract ‘purchase’ implies that you have to take ownership of the vehicle at the end of the agreement by paying the balloon payment, but this can actually be optional depending on the specific type of PCP agreement and the leasing company. Before signing a personal contract purchase agreement, it is important that you understand whether or not the balloon payment is compulsory.
You can add additional services to your personal contract purchase agreement like full maintenance and road tax which get added to the monthly rentals. VAT is payable on the added services. If you like to have a set budget each month to pay for your car that combines all set costs into your monthly payment, it's a big advantage.
The lender providing the personal contract purchase will take a risk on any vehicle they provide as they guarantee the value of the car at the end of the lease period. This is a significant risk as car values can change a lot over the space of 2 - 4 years. Usually at the end of the agreement, if you feel the car is overvalued you can hand the car back without making the final balloon payment. If the car has been undervalued, you will be able to purchase that at the agreed price. It is the customer’s flexibility to return the car that means the leasing company takes the risk.
"A personal contract purchase is a form of vehicle finance for individual purchasers which has similarities to both personal contract hire and hire purchase (buying on installments).
A personal contract purchase deal (PCP) requires the customer to pay a certain amount for a set contract period of somewhere between 24 to 48 months with the right to drive the vehicle while ownership is retained by the funding company. This is similar to contract hire or car leasing, however in this case the individual customer has the right to ultimately acquire the vehicle for a previously agreed total cost. Otherwise the customer can arrange to return the vehicle without any further liability past the end of the contract.
A personal contract purchase is therefore a conditional sale agreement and therefore under UK law the purchaser is protected under the Consumer Credit Act 1974 and the Financial Services Regulations 2004."
Questions surrounding personal car leasing agreements from Creditplus car finance.
Unsure if Personal Contract Purchase is the best car loan product for you, use our interactive tool to discover the best car finance option for you: Car Finance Options tool.
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