What is PCP (Personal Contract Purchase)?
One of the options that you have for purchasing a brand new motorbike is Personal Contract Purchase. It's a type of bike finance where a deposit is paid before monthly instalments for the term of the agreement. You get the chance to spend a more substantial payment to clean the balance to own it outright, or you can choose to exchange it for another bike. If this doesn't work for you, you get to hand it back and walk away from the bike altogether.
You can choose to defer a chunk of the payment until the end of the term of the loan, and this is what keeps the monthly repayments right down. The lump sum payment is also known as a balloon payment, and it's what you pay if you want to own the bike outright.
What’s the difference between PCP and HP?
Many mistake Personal Contract Purchase with Hire Purchase, but there is a difference. With Hire Purchase, you have payments based on the cost of the entire bike with added interest. This leads to high monthly payments, but there's no subsequent balloon payment to worry about. For the length of the Personal Contract Purchase agreement, you're not paying the cost of the bike in full. You're just putting down what it was priced when new versus the forecasted worth at the end of the agreement.
This is known as the Guaranteed Future Value (GFV), and it’s roughly the same amount as the size of the final payment you can make to own the bike outright. The GFV is predicted using typical depreciation rates for the bike’s make and model and takes your expected mileage into account. Don’t forget, though, that your payments are also likely to include a rate of interest, (although some manufacturers do offer 0% finance deals on selected models) and even that you’re paying interest on the total price of the bike, not just the amount you’re borrowing.
How do I get PCP finance?
Personal Contract Purchase isn't a method of finance that is for everyone, the finance agreement you sign will likely be either through the manufacturer or with a separate company. You pay a deposit upfront and there's a chance that you can get a discount on this from certain finance companies.
Why should I consider buying a bike on PCP?
If you like to keep up with the trends and want to change your bike every two to three years, Personal Contract Purchase could be for you. Personal Contract Purchase works best if you're going to start another one at the end, and if the bike is worth enough to cover the balloon payment as well as contribute towards another deposit.
What happens at the end of a PCP agreement?
There are three choices to make at the end of an agreement:
- Giving back the bike. You could find that leasing your bike ends up cheaper in the end if you don't want to redo your agreement. You may be charged if there is damage on the bike.
- Pay the balloon payment and buy the bike. This can be an expensive option if you want to buy the bike outright. Ideally, to own the bike outright, a hire purchase agreement may be more suitable.
- You could also start another deal, and if the bike is worth more than the leftover finance, you could use that ‘equity’ as a deposit.
Pros of Personal Contract Purchase
- The choice to get a new bike every couple of years.
- You pay a fixed amount, so you know your finances.
- You can get an agreement that includes maintenance costs.
- Wide selection of bikes to choose from.
- Dealers and manufacturers occasionally offer great deals on PCPs, including help towards deposits.
Cons of Personal Contract Purchase
- The deposits tend to be higher than other agreements.
- You'd have to pay a large lump sum at the end.
- Going over a pre-arranged mileage limit could be bad for your wallet.
- You'd be charged repairs if the bike is damaged.
- Sometimes, a dealer may offer a 0% APR deal to tempt you, but some are too good to be true, and the money will be found from elsewhere, i.e. a more significant balloon payment, or significant charges for excess mileage or minor damage.