Understanding PCP

13 October 2020

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The low monthly payments associated with Personal Contract Purchase (PCP) agreements make it an appealing option to many motorists, with PCP finance now touted as being the most popular type of car finance. For this reason, many cars that you see driving on the roads today are being paid for in monthly instalments under a PCP.

As well as being affordable, PCP finance is also flexible. At the end of the contract, the driver is given the option of handing back the vehicle or purchasing it for a lump sum – often referred to as a balloon payment. However, the driver is also able to return the car early if they struggle to meet the repayments or want to upgrade to a different model.

How does a PCP work?

When you choose a car with a PCP finance agreement, you effectively borrow the car from the dealership, whilst taking on a loan to cover the loss in value of the vehicle during the contract period. The monthly payments of a PCP are equivalent to the predicted depreciation of the car over the length of the contract.

For example, if you choose a car which is worth £20,000 and the dealership predict that it will be worth £12,000 at the end of your three-year PCP, your monthly payments would coverthe £8,000 difference, along with interest on the whole £20,000 value of the car.

What happens at the end of a PCP?

At the end of the contract term, you have the option of returning the car to the dealership or paying a balloon payment to purchase the car. In our example, the balloon payment would be the £12,000 value of the car.

Often, the car is worth more than the dealership originally predicted. This surplus is reduced from the balloon payment or can be used as equity towards another PCP if you decide to take one out.

A lesser-known (but often more profitable) option is to sell the vehicle, but we’ll come to that later.

How can a PCP be mis-sold?

The National Association of Commercial Finance Brokers (NACFB) has raised concerns that Personal Contract Purchase finance may be being mis-sold by some dealerships. This is because drivers are often persuaded that they are getting a better deal by taking on a PCP instead of a hire-purchase arrangement.

With PCP arrangements, interest charges are considerably higher than with a hire purchase as the interest is charged on the value of the car as a whole. This means that if you decide to buy the car at the end of the contract, you will have paid a lot more interest than if you’d chosen a hire purchase.

Some dealers also talk about ‘profit’ with PCP arrangements. This ‘profit’ arises if the car ends up being worth more than the dealership predicted at the start of the arrangement. ‘Profit’ is the wrong term to use. This is actually money that you borrowed unnecessarily – and paid interest on.

Selling your PCP car

If you want to sell your car during your Personal Contract Purchase, you’ll need to get the agreement of the dealership. If you’re still near the beginning of your PCP, you probably owe more than the car is worth. However, by the end of a PCP, the majority of cars are worth more than the balloon payment.

A large percentage of drivers with PCP finance don’t even consider selling their car as an option. This is because the alternatives such as handing the car back or paying the balloon payment seem easier. However, companies such as anycolourcar.com make this process easy.

If your car is valued as being worth more than the balloon payment, selling it will release cash. You can either make the optional final payment and then sell the car, or you can sell it with the agreement of the lender, just before the PCP term comes to an end.

It’s easy to find out just how beneficial selling your PCP vehicle could be. First, ask your lender for the settlement fee for your vehicle. Then, contact us at anycolourcar.com for an exact price for your vehicle. If the price we offer is higher than your settlement fee, you know you’ll be getting some cash back, proving selling your PCP car to be beneficial.

If you’re ready to find out how much we could offer to buy your car at the end of your PCP arrangement, contact us now.

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