Puzzled by PCP?

May 27, 2019

Car salesman handing woman car keys.Thinking of buying a new car? It’s easy to get carried away… ‘Should I get keyless entry? Apple CarPlay? And heated seats?’. Buying a car is expensive business and PCPs can seem like an attractive option because they usually involve low monthly repayments and a relatively quick approval process. However, PCPs are complex and they can be difficult to understand, particularly when it comes to your options at the end of the agreement.

So before you decide how you’re going to pay for your car here is a quick run through the main features of a PCP:

What is PCP?

A PCP is a particular type of finance which is similar to a Hire Purchase (HP) agreement and they typically last for three years. There are three parts to a PCP – the deposit, the monthly repayments and the final lump-sum payment which is called the Guaranteed Minimum Future Value (GMFV).

Is PCP right for you?

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 (GMFV).

The low monthly repayments – which can make new cars seem very affordable – may mean that you sign up to a contract which could be unaffordable for you when you take into account the size of the final payment.

A complicating feature of PCPs is that, at the end of the agreement, you have three options:

  1. Pay the GMFV and own the car
  2. Hand back the keys and walk away
  3. Enter a new PCP agreement for another car

There are conditions attached to all three options, some of which may impact on how you use the car and how much you will need to pay at the end of the agreement. For example, there are typically mileage restrictions, wear and tear conditions and crash damage conditions that can affect the amount of equity in the car at the end of the agreement if you don’t stick to them.

It is also important to know that you don’t own the car until you pay the GMFV. You need to think about how you will pay the GMFV long before you come to the end of the agreement if you want to own the car. Until you make this final payment, you are really hiring the car.

At the end of the agreement, there might be a difference between the GMFV and the market value of the car, giving you some equity in the car. For example, your GMFV might be €10,000, but the car is actually worth €12,000, giving you equity of €2,000. But depending on the market value and condition of the car, you may have no equity at all. This is important if you intend to use any equity you have in the car as a deposit for your next PCP. If you are planning on trading the car in at the end of the agreement, you need to think about how you would come up with a deposit for your next PCP.

For more information, see our sections on PCPs and buying a car. Also, before you decide how to pay for your car think about the pros and cons of all your finance options including a personal loan or hire purchase agreement.

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For a quick summary of these points, check out our infographic below:

PCP explainer infographic

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