What is PCP? A PCP is a form of car finance similar in principle to a Finance Lease (FL), but instead of paying off the entire value of the car in monthly installments, you are effectively only paying off the depreciation.
In other words, you might be borrowing the same amount initially, but you are only repaying a portion of that borrowing. At the end of a PCP agreement, there is still a final value (often known as the balloon or the buyback price) outstanding. You have several options as to how to deal with this final amount, depending on whether or not you want to keep your car or change it.
If you compare financing the same car on a PCP against an FL, the big difference is that you are paying off a much smaller amount of money, so you have a lower monthly payment and/or lower initial deposit and/or shorter repayment term.
Most people tend to change their cars about every three years. Most buyers financing a car have a reasonably small deposit. For this sort of situation, a PCP will give a much lower monthly payment than an FL, with the caveat that at the end of the agreement you will have to take action of some sort to settle the outstanding balance. This means that on a PCP, the same car will cost considerably less per month to finance than on an FL, or alternatively you can buy a more expensive car for the same monthly payment. This is what makes a PCP so attractive to the car buyer.
As with an FL, a buyer will put down a deposit on their new car and finance the balance. With a PCP, there is a maximum deposit that is allowed (which varies from finance company to finance company), but usually it’s about 30% of the total price of the car. Your deposit can be cash or your current car as part-exchange (trade-in), or a combination of both.
Most PCP deals are available for anywhere between 18 and 48 months, although the most common is 36 months. As a general rule, longer terms give lower monthly payments, although it’s not necessarily a dramatic difference because longer terms have lower final balloon payments.
Guaranteed Minimum Future Value (the balloon / the buyback price)
The Guaranteed Minimum Future Value (GMFV) is the key to how a PCP works. As mentioned earlier, over the term of your agreement, you are only paying back a portion of the borrowing. When you apply for a PCP, the finance company calculates a predicted minimum value for your car at the end of the agreement, and your deposit and monthly payments are paying off the difference between the initial buying price and this predicted value. This final value then needs to be paid to settle the finance agreement, either by returning the car or paying out the remaining amount.
So you have reached the end of your PCP agreement and the finance company has written to you to remind you that you will have to settle the outstanding balance fairly soon. What are your choices? Well, in no particular order:
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