Car leasing has numerous advantages over purchasing a car, but it also has one major drawback – the car is never yours. Until PCP…
What if you could combine the advantages of a car leasing deal, but have the option to own the vehicle ? Well you can, thanks to a process known as Personal Contract Purchase (PCP).
PCP is growing in popularity and is a straightforward method of car finance, as this guide to personal contract purchase will explain.
Broadly, personal contract purchase is the same as a personal contract hire agreement – but with one key difference. At the end of the contract, the leasee has the option to own the vehicle. The price is determined at the outset and allows the driver to keep the vehicle if they wish. However, it is not essential – on the contrary, as with a personal contract hire deal, you could choose to return the car to the leasing company and walk away – subject to fair wear and tear and mileage.
Monthly payments are based on the difference between the retail value of the car and the residual value. The estimated future value of the vehicle after depreciation is taken into account. Therefore, the more the vehicle holds its value, the better your PCP deal will be as that will reduce your monthly payments.
A mileage limit will apply to all personal contract purchase deals. The leasing company will use the mileage limit to determine the vehicle’s depreciation and residual value. So it’s important to be honest with the leasing company about how much travelling you are likely to do – exceeding the mileage limit will lead to financial penalties at the end of the agreement.
Personal contract purchase is seen as a direct alternative to the traditional Hire Purchase (HP) agreement and is subject to the protections set out in the Consumer Credit Act.
There are many advantages to personal contract purchase including:
Personal Contract Purchase agreements have several disadvantages. These include ensuring the vehicle is maintained – if the driver hands the car back at the end of the agreement in a condition worse than acceptable wear and tear, the driver will be liable for all repairs.
All PCP deals contain a strict mileage limit, cars with higher than the agreement limit will be charged. This is called an excess mileage charge and is based on a pence per mile agreed at the onset. However, the majority of our funders allow the leasee to amend the contracted mileage.
Comprehensive car insurance is a must as the car will not be yours until the balloon payment is made.
The road fund licence does not come built in to PCP agreements.
Generally, personal contract purchase is seen as the ‘best of both worlds’. You can choose to walk away from a deal, or exercise the option to buy. Overall, PCP will generally be more expensive than contract hire but monthly payments remain low and affordable.
If you travel fixed distances and have a stable lifestyle, the mileage issue should not be a problem. Consequently, PCP is well-suited to people who want to drive a car that would otherwise be out of reach. Those who like to regularly change their car, and who want to keep their options open with the right to buy.
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