What are the Pros & Cons of PCP Car Finance?
Personal Contract Purchase (PCP) is one of the most popular ways of financing a car purchase in the UK, but is it always the best for you?
let’s look a little deeper.
How does PCP work
Think of it as a lease with a confirmed option to buy at the end. You pay a deposit, then a series of monthly payments; at the end of the finance period you have to pay an additional optional balloon payment if you want to keep the car.
What happens at the end of a PCP deal?
When your PCP deal comes to an end you have 3 options available to you.
Buy the car outright : You’ll need to pay a lump sum to keep the car, known as a balloon payment or optional final payment, which was agreed at the beginning of the term.
Part exchange the car : If the car is worth more than the balloon payment amount you may be able to use that value as a deposit on another.
Hand the car back : Simply return the car to the lender. Be aware that, just like with any form of car leasing, you may be liable for additional charges if the car is damaged, has missing items, hasn’t been serviced in line with your agreement, or has gone over the agreed mileage.
The Pro’s of PCP
It’s a little more flexible than traditional contract-hire leasing.
In a rising market (where used car values are going up) it can be great, you might be able to sell your car for a profit at the end of the PCP, or even during the initial period.
You can buy this kind of car finance from a car dealer or a third party, so you can shop around!
It’s available on new and used cars.
The Con’s of PCP
It can work out as an expensive way of leasing a car, particularly for those who just hand the car in or part exchange it for another at the end of the initial period.
In a falling market (where used car values are going down) you’re unlikely to make much profit if you sell the car at the end of the deal - it could be that the car is in negative equity meaning your balloon payment is more than the value of the car.
You need to ensure you stick to the agreed mileage, keep the car servicing up to date, and do not damage the car outside of “Fair Wear & Tear” guidelines; otherwise, you could be charged.
The smoke and mirrors tactics used by some dealerships when selling PCP are ethically questionable at times.
Why is PCP so popular?
Good question. This kind of finance is very popular with car dealers as it gives the impression of low payments and makes it very easy for them to move you into another car at any stage. Dealers often offer "special deals” if you agree to sign up to their PCP finance such as longer warranty, free servicing, free paint protection or any other number of inducements.
Just ask yourself why they are so keen for you to do this, and why they will try and push PCP even when you’re happy to pay cash. Firstly, it’s profitable for them, secondly, they have a second, third, and maybe even a fourth bite of the cherry from you as a customer as, at the end of your PCP (or even during the agreement) they can easily pick up the phone and offer you something else for just an extra £x per month. The “average customer lifetime” for a car dealership is far greater with those customers on PCP finance deals.
PCP can just be an expensive way to buy or lease a vehicle. Just like any kind of finance, interest is charged and the car could be repossessed if you don’t keep up with your payments, so ensure you understand the total cost of the car to you before signing up for anything.
Tip for the day : Always do your sums yourself, don’t be pushed into anything by a dealer, and fully understand what you’re signing up to before you sign!