Personal contract purchase, or PCP, works on the same premises as PCH (personal contract hire) but with a significant difference. On completion of the deal, there is a voluntary balloon payment you can choose to fulfil in order to take full possession of the vehicle. The amount payable is established at the outset and will allow drivers to keep their vehicle if they wish to do so. This option is not mandatory; drivers also have the option to return their vehicle to the leasing company.
Monthly instalments are calculated by taking into account the difference between the retail value of the vehicle and future value after depreciation. So, the better the vehicle is at holding its value, the better your PCP deal will be. This will reduce your monthly payments.
A mileage limit of course applies to all personal contract purchase deals. Why? Your leasing company will use this limit to determine your vehicle’s depreciation and residual value. Therefore, it is really important that you are honest with your leasing company about how much travelling you do; exceeding your limit is likely to lead to penalties.
PCP is a direct substitute for hire purchase and is of course subject to the protections set out in the Consumer Credit Act.
The Pros & Cons of Personal Contract Purchase
- Fixed prices allow you to manage payments easily and help you budget properly.
- Initial deposit is usually quite small.
- Including a balloon payment allows the option to defer payments.
- Option to refinance the balloon payment on completion of the contract.
- Most PCP agreements include servicing packages, ranging from basic maintenance to total vehicle management.
- Option to walk away at the end of the term and avoid depreciation concerns.
- PCP allows access to previously unaffordable ‘upmarket’ vehicles with low deposits and monthly payments.
- There are not many drawbacks to a PCP agreement but it can be more costly than hire purchase agreements. You will however have to arrange comprehensive car insurance as you will not own the vehicle until the balloon payment is made.
Is Personal Contract Purchase right for me?
PCP is often referred to as the best of both worlds as you can choose to walk away or exercise your right to buy at the end of your contract. Although this type of agreement is generally more expensive than your typical contract hire purchase deals, the monthly payments are usually very low. If you travel a set distance every day and have a stable lifestyle, mileage and payments should not be a problem.
If you wish to drive a car that would otherwise be unattainable, but also want to keep your options open, then personal contract purchase is probably the best option for you.
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