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PJ Nicholls Finance
What is Personal Contract Purchase (PCP)?
Personal Contract Purchase (PCP) is a finance product that allows you the opportunity to buy a new or a used car.
It is similar to a Hire Purchase agreement as you will usually pay an initial deposit, followed by monthly instalments over a term typically between 18 to 48 months.
What makes PCP different to Hire Purchase (HP) is that your monthly instalments are paying off the depreciation of the car, and not its entire value, over the course of the term. Then, when you get to the end of your agreement, there is a final, balloon payment that must be made if you want to keep the car. The balloon payment is often referred to also as the Guaranteed Future Value (GFV).
How does PCP actually work?
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When you have chosen your vehicle, you will then agree your annual mileage and decide on the agreement term with one of our Business Managers.
We will then determine the Guaranteed Minimum Future Value (GMFV) of the vehicle at the end of the agreement and work out a deposit and monthly amount that works for you.
At the end of your agreement you will then have three options:
Return – Simply return the car the back to us
Retain – Keep the car by paying the optional final payment
Renew – Trade it in for another car
For a quotation, help, or advice contact us and ask to speak to one of our Business Managers.
What are the advantages of PCP?
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- Monthly payments on a car financed by PCP are usually lower than if your car is financed by a Hire Purchase agreement.
- If you decide not to buy the car, you can simply walk away when you've made all the payments.
- Similar to PCH, you can drive away a new or used car every few years (dependent on the chosen term) without worrying about selling it on.
- If your car is worth more than the Guaranteed Future Value then you can use that equity towards a deposit on a new car.
What should you consider when opting for a PCP?
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- If you want to buy the car you will need to pay your final balloon payment (the Guaranteed Future Value).
- Similar to PCH, you will need to agree on a mileage allowance at the beginning of your contract and there may be excess mileage charges if you exceed this.
- You won’t be able to sell the car without settling the finance.
- You won’t own the car until you have made all of your repayments.
- You’ll need to keep the car properly insured, maintained and in your possession until the full value is paid off.
Can I settle my PCP agreement early?
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You can normally settle your agreement early by asking the finance company to provide you with a settlement figure. However, the finance company will require you to pay off the difference between what your car is worth, and what you still owe and there may be a difference which is known as negative equity. On the other hand, you may find that at the end of your term your car is worth more than the Guaranteed Future Value, which means you will have some positive equity to contribute towards your next car.
What is Hire Purchase (HP)?
Hire Purchase is a way to finance buying a new or used car. You will normally pay an initial deposit and will pay off the entire value of the car in monthly instalments. When all the payments are made, the Hire Purchase agreement ends, and you own the car outright.
What are the advantages of HP?
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- You’ll be able to drive away a car that you may not have managed to buy outright.
- Unlike a PCP or PCH contract, you won't need to estimate your mileage at the start of your Hire Purchase agreement, so you'll avoid excess mileage charges.
- Once you’ve made your final monthly payment, including the option to purchase fee, you'll have full ownership of the car.
What should you consider when opting for HP?
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- Monthly payments may be higher than some other finance options, such as PCP, as you're paying off the full value of the car.
- You won’t be able to sell the car without settling the finance.
- You won’t own the car until you have made all of your repayments.
- You’ll need to keep the car properly insured, maintained and in your possession until the full value is paid off.
Can I settle my HP agreement early?
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The short answer is yes, you can end your finance early. There are different provisions within each finance agreement that allows you to do just that. If you have got through two-thirds of the way through your finance agreement, the options to end the finance agreement early open up.
For a Hire Purchase agreement, there is an option of paying it off early through a settlement fee. A settlement fee covers the cost of any remaining unpaid instalments and interest payments remaining on the agreement. Once the settlement fee is paid, you take full ownership of the car early.
Under a Personal Contract Purchase agreement, you can also pay a settlement fee for bringing the agreement to an end early. After that, you can choose to hand the car back or you have a second option. Through a PCP agreement, you can take full ownership of the car by paying off the remaining Guaranteed Minimum Future Value also known as a balloon payment.