Personal Contract Plan (PCP)

Personal Contract Plans (PCPs) have become very popular in recent years, whereby you simply pay for the depreciation on your new car. This type of finance is ideal for anyone who wants to keep their repayments low and like a new car every two to four years. However, unless you buy the car at the end of the contract, you never get to own it.

How it Works

As with hire purchase, you pay a deposit and monthly instalments (typically at 9-14% APR), leaving a lump sum to pay off at the end of the contract. This deferred sum is set by the finance company, and is known as the minimum guaranteed future value (MGFV) or the balloon payment. This is the amount that the lender guarantees that your car will be worth at the end of the contract.

At the end of the contract, you have several options:

• Hand the car back to the dealer and walk away.
• Pay the deferred sum and keep the car.
• Sell the car privately to fund the final payment and hopefully give you a little extra cash.
• Change to another PCP scheme. If the car is worth more than the MGFV, you can use the difference as a deposit on a new car.

Although the monthly repayments are often lower, in general, PCPs usually work out more expensive than hire purchase . You will be charged for any excess mileage stated in the contract (often at around 10p a mile), and you will have to pay for any damage to the car.

PCP Example

A car worth £9,000 may be given an MGFV of £4,000 after a 3-year contract. After making 3 years of finance payments, you can either pay the lender £4,000 to keep the car, or hand the car back. If the car was worth, say £5,000 at that point, you might want to sell it privately to raise the money to pay the balloon payment (with you keeping the extra £1,000) or you could use the £1,000 difference in price to use as a deposit on a new PCP.

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