We asked Magnitude Finance to help answer this question. They are experts in providing PCP finance on used cars and can offer competitive online finance quotes on used cars that are up to 5 years old and have less than 70,000 miles on.
Their short answer was; ‘PCP typically lower monthly payments compared to traditional Hire Purchase (HP), because you're only paying for the depreciation of the car during the contract period, rather than the entire cost of the vehicle’. Read on to find out exactly how PCP works.
PCP car finance is a variation of a Hire Purchase (HP) agreement or conditional sale. Just like HP, you pay an upfront deposit and monthly payments. The key difference is that the value of the car at the end of the contract, known as the Guaranteed Future Value (GFV), is subtracted at the beginning of the agreement. This means you only pay for part of the car.
Since you're not paying for the entire cost of the car, PCP agreements typically offer considerably lower monthly payments compared to a normal HP agreement. The GFV is determined by several factors, including the age of the car at the end of the agreement and the expected mileage it will cover.
Here's how PCP car finance works:
1 Initial Deposit - You begin by making an initial deposit on the car, which can range from as little as £500 up to 30% of the total car price. It's important to note that this deposit is not refunded at the end of the agreement; it's part of your overall repayments.
2 Monthly Payment - Following the initial deposit, you'll make fixed monthly payments for the duration of the agreement. These payments typically cover the car's depreciation over the contract term, in addition to interest charges.
3 Contract Term - PCP agreements usually last between two to five years, although the exact term can vary depending on the age of the vehicle at the start of the agreement.
4 Mileage Allowance - PCP agreements are based on your estimated annual mileage, which determines your total contract mileage allowance. Mileage is one of the factors that finance companies use to calculate the GFV and set the monthly payments
5 Interest Charges - PCP agreements are a type of Hire Purchase agreement and have an interest rate, which is usually fixed for the duration of the contract. The total amount of interest you pay on a PCP can vary based on factors like the interest rate, contract length, initial deposit amount, and the projected residual value of the car at the end of the contract. Even though you're not repaying the capital cost of the GFV, you're still paying interest on it.
6 Guaranteed Future Value (GFV) - A key feature of PCP is the GFV, which is an estimate of the car's value at the end of the contract. This value is set by the finance company based on factors such as the car's make, model, age, and mileage. The GFV represents the amount you'll need to pay if you decide to purchase the car at the end of the agreement.
7 Options at the End of the Agreement - There are three options available at the end of a PCP agreement:
- Pay to Keep the Car - You can pay the GFV as a lump sum if you wish to keep the car, either using your own funds or by refinancing it through another loan.
- Exchange the Car - If your car has equity (the difference between the GFV and the agreed part-exchange price), you can use this as a deposit on a new PCP agreement for another car. Please note that equity is not guaranteed and is subject to market conditions.
- Return the Car - You can simply return the car to the finance company at the end of the agreement, provided you've stayed within the mileage limits and maintained the car in good condition. You won't owe anything more, but you also won't own the car.
8 Optional Final Payment - This refers to the GFV and is sometimes called a ‘balloon payment’ because it's a larger final payment due at the end of the contract. A PCP agreement safeguards the customer from any residual risk by offering a guaranteed GFV. If the vehicle is worth less than the GFV at the end of the contract, the finance company absorbs the shortfall.
9 Wear and Tear - Finance companies acknowledge that vehicles may experience some damage as a result of everyday use and aging, known as Fair Wear and Tear. For example, minor scratches and scuffs consistent with normal use are typically considered fair wear and tear, while extensive damage or excessive wear may not be. Excessive damage could result in additional charges, but these only apply if you return the car.
10 Flexible Agreement - PCP offers flexibility because you have choices during, and at the end of the contract. You can enjoy a new car every 2 to 5 years without the hassle of selling the car. However, if you decide to change or sell the car partway through the agreement, you can simply request a settlement figure.
In conclusion, PCP car finance can be an attractive option if you enjoy driving a new car every few years and prefer lower monthly payments compared to traditional car loans. However, it's essential to read the contract carefully, understand the terms and conditions, and ensure that the deal aligns with your budget and driving needs.
If you are looking to finance your next car, then why not try their online PCP calculator? They quickly compare over 20 lenders, just enter the registration number, and get your personalised quote.