How do you know if a PCP is right for you?
June 6, 2018
Personal Contract Plans (PCPs) have quickly become one of the most popular forms of car finance with around one third of new cars now being bought using this type of finance. People are also increasingly using PCPs to buy second hand cars.
PCPs can seem attractive because they usually involve low monthly repayments and a relatively quick approval process on the garage forecourt. However, PCPs are complex and they can be difficult to understand, particularly when it comes to your options at the end of the agreement.
PCPs – key points
PCPs are very different to other types of car finance because a large part of the payment is made at the end of the agreement. This means there are often low monthly repayments with a lump sum at the end, called the Guaranteed Minimum Future Value (GMFV). A complicating feature of PCPs is that, at the end of the agreement, you have three options:
- Pay the GMFV and own the car
- Hand back the keys and walk away
- Start a new PCP agreement for another car
There are conditions attached to all three options, some of which may impact on your use of the car and how much you will need to pay at the end of the term. It is important to know that you don’t own the car until the GMFV is paid.
If you intend to trade in your car for a newer model, you will need to pay a deposit. There may be equity in your current car if, at the end of the term, the GMFV is less than the market value of the car. This can be used as a deposit for your new car. For example, if the GMFV is €10,000 but the car is worth €12,000, you have equity of €2,000 to put towards your next deposit.
Factors such as the condition of the car or changes in the second hand car market can impact on the market value so be aware that there may not always be equity in an older car to cover the deposit on a new one.
If your aim is to eventually own the car, it is important that you don’t just look at the cost of the monthly repayments, but consider how you will pay for the GMFV at the end. If you plan on handing back the keys or entering into a new PCP agreement, there are certain conditions you will need to meet such as mileage limits and servicing requirements, and you will need to return the car in good condition. So it is very important that you check all of the details before you sign up.
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