What is Personal Contract Purchase (PCP)?

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PCP – also known as Personal Contract Purchase, or Personal Contract Plan – is a type of vehicle finance agreement for individuals wanting to hire a car for private use. It is a flexible and cost-effective method of financing a new car and has become increasingly popular over recent years.

What does PCP involve?

When you apply for a personal contract purchase plan, you will be required to pay a deposit, followed by a series of monthly payments over an agreed period of time. This is similar to how you purchase a car with a loan, but generally PCP payments are more cost-effective.

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Minimum Guaranteed Future Value (MGFV)

At the start of the contract, a minimum guaranteed future value (MGFV) of the vehicle – or balloon payment – is agreed upon. This will identify the minimum amount your vehicle will be worth at the end of the contract. With this in place, you will be protected if your car suddenly drops in value by the time your agreement ends. It also means that, if your car happens to be worth more, you can use the equity as a deposit on your next PCP deal.

The agreed monthly payments you make will cover the cost of the vehicle after the MGFV and the sum of your deposit have been deducted. Vehicle tax is also included for the first 12 months of the contract. Whilst interest rates are often low, finance companies will set a mileage allowance. You will have to pay excess charges if you exceed the mileage.

End of Term Flexibility

At the end of the agreement, you will have paid off around a third of the cost of the car. Effectively your monthly payments will cover the vehicle’s depreciation. You can choose to pay the outstanding amount that is owed – the balloon payment – and take ownership of the vehicle, or you can return it to the finance company.

Alternatively, you may be allowed to refinance the vehicle, subject to credit. This means you pay the balloon payment in monthly instalments. At the end of this agreement you will officially own the vehicle.

The Benefits of PCP

There are a number of reasons why motorists are turning to PCP deals as a method of financing a new car. The benefits include:

  • At the end of the contract, you have the option to purchase your vehicle or hand it back to the finance company. If there’s another car you’d like to try for a few years, you can apply for another PCP deal.
  • Flexible terms – Your monthly payments will be tailored to your financial situation and your driving habits. This includes a set mileage limit and duration.
  • Low monthly payments – The fixed monthly payments are lower than payments required for a loan.
  • Included maintenance – There is the option to include maintenance payments for the vehicle in your monthly fees. This will help to spread the cost.
  • Ownership can pass to you at the end of the agreement if you choose to buy the car.
  • No risk of negative equity at the end of the agreement.
  • You can drive the car of your choice without risking the loss in value.

Am I eligible?

You can only take out a personal contract plan purchase agreement if you are a financially eligible driver with a full UK driving licence, looking to lease a vehicle for private use.

PCP and Insurance

You will need to apply for insurance when you take out a PCP deal, however you may find most mainstream insurers do not provide suitable policies for drivers who do not legally own the vehicle.

Financing a new car through a PCP deal means you are not the official owner of the vehicle. The finance company keeps ownership of the car until you pay the balance in full – or until your term ends and you choose not to pay the final balloon payment.

If you have a car on finance through a personal contract plan a specialist insurer will guarantee you the best deals to meet your specific requirements. At Keith Michaels, we provide small business owners who have a PCP vehicle, with unique business car insurance that protects its use for business-related activities.

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