Personal Contract Payment (PCP) is a finance product that reduces the monthly payments by delaying part of the repayment until the end of the deal. It offers a wide range of flexibility with monthly payments, annual mileage, deposit and the final payment all adjustable to meet your needs. You can also settle your agreement at any time.
All these factors play a part in how much you will pay back each month. Like with Hire Purchase, the more you put down as a deposit, the less you will pay back each month. If your annual mileage predictions are low then you will also pay less per month. Annual mileage is important for PCP because this will affect the residual value of the car (more on that later). However, it's important to give clear and accurate information to your business manager as you can incur financial penalties if you exceed your stated mileage.
When settling your PCP agreement you will have three options. The first is to make the final payment which is known as the residual value of the vehicle. Once this is paid you will take full ownership of the car. This figure is worked out at the time of your agreement's inception using industry data specific to your vehicle to determine it's likely value at the end of your deal. What's good about this is that it is often adjusted down to ensure that you are left with equity once your deal is finalised. As well as this, the final payment is guaranteed by the finance company so long as you take appropriate care of the vehicle, just in case their forecasts are incorrect. Giving you peace of mind once your deal has finished.
The second option at the end of your PCP deal is to decline the payment of the residual value and return the vehicle to the finance company at no extra cost and just walk away. It's really that simple.
The third and final option is to part exchange the vehicle at the end of your agreement and use the equity from the vehicle being handed back to begin a new PCP deal all over again. As mentioned before you are often left with equity at the end of your deal so you can use this to help finance your new deposit. This option is becoming popular as it allows you to simply transition from one car to another with minimum hassle.
Benefits of PCP
- Lower monthly payments than Hire Purchase and a Personal Loan
- Alternatively, you can get behind the wheel of a more expensive car than you would have been able to afford on another method of finance
- No need to worry about the future value of the car as it is guaranteed by the finance company
- Multiple options open to you at the end of the deal
- Can be tied into service packages so that all your car payments go out as one easy to manage sum