PCP or Personal Contract Purchase is a popular financing option for buying a car in the UK. It is a type of lease agreement that enables you to drive a new car without actually owning it. In this article, we will be discussing how a PCP agreement works and what you need to know before signing up for one.
How does PCP work?
A PCP agreement typically involves three parties – you, the finance company, and the car dealership. Here’s how it works:
Step 1: You choose the car you want to purchase from a dealership.
Step 2: You agree on a deposit amount, the length of the agreement, and an annual mileage limit with the dealership.
Step 3: The finance company buys the car from the dealership and leases it to you for the agreed-upon period.
Step 4: You make fixed monthly payments to the finance company for the duration of the agreement.
Step 5: At the end of the agreement, you have three options to choose from:
– Buy the car by paying a pre-agreed balloon payment (an outstanding amount left due at the end of the agreement).
– Return the car to the dealership and walk away.
– Trade-in the car for a new one and start a new PCP agreement.
It’s important to note that the amount of the balloon payment is calculated based on the depreciation value of the car over the PCP agreement period. The more the car depreciates, the higher the balloon payment will be.
Advantages of PCP
– Lower upfront costs: A PCP agreement allows you to put down a smaller deposit compared to other finance options.
– Lower monthly payments: Since you’re only paying for the depreciation value of the car, your monthly payments are generally lower.
– Flexibility: At the end of the agreement, you have the option to either buy the car or walk away. You also have the option to trade-in the car for a new one and start a new PCP agreement.
– Protection against depreciation: If the car’s value drops significantly during the agreement period, you have the option to return the car to the dealership without having to worry about negative equity (the outstanding amount left to pay for the car is greater than its value).
Disadvantages of PCP
– Mileage limits: PCP agreements come with annual mileage limits. If you exceed the mileage limit, you may have to pay additional fees.
– Balloon payment: The balloon payment can be a significant amount, which you need to factor in when choosing a PCP agreement.
– You don’t own the car: Since you’re only leasing the car, you don’t own it until you make the final balloon payment.
– Extra costs: You may have to pay additional fees for wear and tear or damage to the car.
In conclusion, a PCP agreement can be a great financing option for buying a new car. It allows you to drive a new car without having to worry about upfront costs and high monthly payments. However, you should carefully consider the pros and cons of a PCP agreement before signing up for one. Make sure you fully understand your obligations and the costs involved in the agreement, so you can make an informed decision.