Personal Contract Purchase (PCP)
A Personal Contract Purchase (PCP) is a purchase agreement. It operates in a similar manner to a Hire Purchase. PCP differs from other financing methods due to its payment profile and structure.
The calculation to ascertain the repayment amount is determined by the size of the deposit, the anticipated mileage and the length of the finance agreement. Once these details have been established, the financier calculates a predicted minimum future value (balloon payment). This is offset until the end of the agreement and is called a Guaranteed Minimum Future Value (GMFV). This is set and guaranteed by the manufacturer or finance company and allows the customer to know the least amount the guarantee will be worth at the end of the agreement.
A PCP loan, generally, operates on a fixed term with a fixed monthly payment. Agreements are normally 24 to 48 months long. The balloon payment or GMFV will come at the end of this term.
At the end of the agreement, the consumer has the option to keep the vehicle, hand the vehicle back, or part-exchange the vehicle for another finance agreement.
If the customer wishes to keep the vehicle, they must settle the balance of the repayments, pay the GMFV and settle any option to purchase see, which may apply. Many finance companies allow the GMFV to be refinanced, to prevent the customer from having to find a large amount of money.
Should the customer decide that they wish to hand back the vehicle, like a Hire Purchase it is subject to settling the balance of the loan. They must also ensure that the vehicle must have been kept in a ‘good condition’, any damage which is beyond ‘reasonable wear and tear’ is the responsibility of the customer. The customer should ensure that the vehicle has not exceeded the anticipated mileage, if it has exceeded this number, the customer will be charged at a pence per mile rate plus VAT.
If the vehicle is worth more than the GMFV (also known as equity), the customer can use the equity as a deposit towards their next finance agreement. Alternatively this can be given back to the customer as ‘cash-back’. The customer can also sell the vehicle privately and settle the GMFV using this money. They must then pay the outstanding amount to the finance company and are able to keep any profit.
The agreement can be ended at any time by settling all outstanding balances on the agreement and paying any necessary fees. In most cases, any surplus interest will be rebated to the customer by the finance company. If the Consumer Credit Act regulates the agreement, the minimum amount to be repaid is stipulated by the Finance and Leasing Association.