Personal Contract Plans (PCPs)
Many car dealers offer Personal Contract Plans (PCPs) as a way to pay for a car. PCPs can appear very attractive because they usually have low monthly repayments. You also have the convenience of being able to sort out your finance and pick your car in the same place. However, PCPs are very complex compared to other types of car finance and it’s important to understand all the terms and conditions before you sign up.
A PCP is a particular type of finance which is similar to a standard Hire Purchase (HP) agreement. Many of the legal rules that apply to HP also apply to PCPs, for example the third rule and the half rule. However, the major difference is that you pay less of the amount owed during a PCP agreement than with HP, meaning you will still owe a considerable amount at the end of a PCP agreement.
Starting a PCP
- The three parts of a PCP agreement
- How flexible is a PCP?
- Comparing a PCP with a personal loan
- PCP and your credit record
- What to consider before signing up to a PCP agreement
- The deposit
- The monthly repayments
- The final lump-sum payment which is called the Guaranteed Minimum Future Value (GMFV)
The deposit: This is typically between 10% and 30% of the value of the car. Your deposit can be paid in cash or, if you already own a car, you can trade it in as your deposit.
Monthly repayments: PCPs generally last for three years and they can have low monthly repayments. This can make them seem more affordable compared to other forms of finance. The reason the monthly repayments are low is because a large portion of the cost of the car is not paid until the end of the agreement.
GMFV (lump-sum payment): This large, final payment is how much it will cost you to own the car at the end of the agreement. This figure is set at the beginning of the agreement by the finance company.
PCPs are among the least flexible forms of car finance. Because the repayments are fixed for the term of the agreement, you can’t usually increase your repayments each month if you want to and if you want to extend the term, you may be charged a rescheduling fee. There may also be other limitations, such as not going over a certain mileage limit, and commitments around wear and tear and servicing the car that you must agree to.
The main difference between a PCP and a personal loan is that with a personal loan you borrow the money, pay for your car, and own it immediately. With a PCP you don’t own the car: you are essentially hiring it for an agreed period of time, typically three years. You only own it if you pay the GMFV. This is important because if you run into financial difficulty during your agreement you wouldn’t be able to sell the car unless you had permission from the finance company – as they are the legal owner of the car.
As with other types of credit, when you take out a PCP, your finance company will send details of the repayments you make to a credit reference agency. Find out more about what information is shown in your credit history.
|Top tip – BE AWARE|
|If you agree to act as a guarantor for someone taking out a PCP you are in fact a joint hirer and not just a guarantor. Any missed repayments on the agreement will also show up on your credit record. As a result of this you may find it difficult to get a loan in the future.|
- What are the mileage limits and what are the penalties if you go over them?
- What are the rules around making modifications to the car?
- Are there rules around servicing the car?
- Are there rules around what type of insurance you need to take out? For example most PCP agreements highly recommend that you take out comprehensive insurance.
- At the end of the agreement, will you be able to pay the GMFV or have enough money saved for a deposit for a new PCP?
During a PCP
- If you go over your mileage limit, what should you do?
- Can you cancel your PCP before you finish your monthly repayments?
- Can your car be repossessed?
- What happens if the car is faulty?
If during your contract you expect to exceed or find that you have actually exceeded the agreed mileage limit, you should talk to your car dealer about restructuring your agreement. You can restructure your agreement by changing from a PCP to a HP agreement or you can return the car early. By returning the car early you can enter into a new, more suitable agreement which has a higher mileage limit or no mileage limit at all.
You will need to have a look at your agreement terms and conditions so you know what you’re going to be charged if you exceed mileage limits. For a realistic estimate of your mileage, check your service records or you can work it out using your odometer.
With a PCP you can end your agreement at any time and give back the car and pay half the PCP price – this is called the ‘half rule’.
The half rule is part of the Consumer Credit Act 1995 and gives you the right to end a PCP at any time. The half rule limits your liability (the amount you are responsible for) to half the PCP price of the car. The agreement from the finance company must show the figure for half the PCP price of the car.
If you have paid less than half of the PCP price of the car, you can end your agreement and give the car back, and you will only owe the difference between what you have paid, and half of the PCP price of the car. You don’t have to pay half the PCP price to the finance company before you end the agreement under the half rule. However, you will have to pay the difference between the payments you have made to date and half the PCP price. You will also be responsible for the cost of any repairs that are necessary.
If you have paid more than half of the PCP price of the car and have not missed any payments, you can end the agreement and hand back the car. You will be responsible for the cost of any repairs that are necessary. If you have paid more than half of the PCP price, you will not be entitled to any refund.
If you’re having trouble making repayments on your PCP you can see what your options are here.
With a PCP, your car can be repossessed if the terms of the agreement are broken, for example if you have missed repayments. If you have paid less than one-third of the PCP price, the finance company can take back your car without a court order.
If you have paid more than one-third of the PCP price, the finance company will need a court order to take back the car. In addition, the car cannot be repossessed from your private property. For example, if the car is parked in your private driveway, it can’t be taken away, regardless of how much money you’ve paid back.
If your car is repossessed, the lender will generally sell the car and the money goes towards the outstanding debt. But you will still be liable for the difference between what is owed and what the car is sold for. For example, if the car is sold for €15,000 and you owe €18,000, you will still have to pay back the €3,000.
When you buy goods, including cars, they should be of merchantable quality – that is fit for purpose. If you buy a car on PCP and realise its faulty, you should return to the dealer you bought the car from and ask them to fix it. If the car dealer refuses to fix it or tries to charge you, then you should contact the finance company who you are making your monthly repayments to – as they are the legal owners of the car.
As the legal owners, the finance company has a responsibility to help you get the issue resolved. If the finance company will not help you resolve the issue you can go through their complaints process and if necessary escalate it to the Financial Services and Pensions Ombudsman.
At the end of a PCP
- What happens at the end of a PCP?
- What happens if the car is worth less than the GMFV?
- What happens if your mileage is higher than what was agreed?
At the end of your agreement you can:
- Pay the GMFV and own the car. Until you make this final payment you don’t own the car – the finance company does. This means that for the duration of the agreement, you are really only hiring the car. If you want to own the car, you will need to think about how you plan to pay for the GMFV long before your agreement ends. Unless you’ve been saving for this lump-sum payment, it may mean having to take out a personal loan to pay for it. Alternatively, your finance company may be willing to arrange finance to cover the GMFV when the PCP agreement ends.
- Hand the car back. Be aware that if you hand the car back, while you generally don’t have to pay the car dealer anything more, you might have to pay a penalty if you haven’t met all the terms and conditions. For example, if you have exceeded any mileage limits or if there’s excessive ‘wear and tear’ on the car.
- Enter into another PCP agreement. The deposit you put down for your first car won’t be given back to you. If your car is worth more than the GMFV then you may have some equity to put towards a deposit on a new car. For example, if the GMFV is €10,000 but the car is worth €12,000, you will have €2,000 to use as a deposit for your next car. The value of the car will depend on its condition and the second hand car market.
When the GMFV is set at the beginning of the agreement it’s usually lower than the expected value of the car at the end of the agreement, so that there will be some equity in the car at the end of your agreement. But, if the value of second-hand cars has fallen by the end of your PCP, then you may not have any equity in the car at the end of the agreement. And if your car is in poor condition, the value may be lower than you expect. If you have no equity to use as a deposit on your next car, you will need to fund it another way. Or, if you want to pay the GMFV and own the car, you might find you are paying more than the car is actually worth.
At the end of your agreement, if you want to return the car and walk away or enter into a new PCP, mileage becomes important.
If you are giving the car back and you have exceeded the mileage limit, you may have to pay a financial penalty. If you are entering into a new PCP, and you’ve exceeded the mileage limit, this will affect the amount of equity you have to use as a deposit for your next PCP.