Personal Contract Purchase (PCP) is similar to Hire Purchase in that you borrow money and pay back in monthly instalments.
As with HP, you make an up-front deposit at the start and make monthly payments after.
Unlike HP, however, you don’t pay off the full value of the car in instalments. Instead, you pay off the amount the finance lender predicts the car will lose in value over the length of the contract, minus your deposit. This is called the minimum guaranteed future value (MGFV).
So say you get a car worth £30,000 and it’s projected that in three years, the car will be worth £22,000. You’ll pay back the £8,000 difference over your three-year contract, in 36 instalments.
The MGFV will vary between cars, trim levels and engine sizes. You’ll pay monthly for the duration of your contract, usually for 24 to 48 months. The MGFV can also be affected by the length of your contract and the car’s mileage at the end of the contract. The higher the mileage, and the older the car, the less valuable it will be at the end of the contract and so the more you’ll have to pay each month.
Another major difference between PCP and HP is that a large percentage of your debt is left to the end of the loan. It usually means you pay smaller amounts each month (when compared to HP) until the end of the contract, when you pay off the remaining amount in a ‘balloon payment’ before you own the car.
Unlike HP, you also have the option to return the car at the end of the contract. And if your car is worth more than the MFGV (for example you’ve kept it in great condition and it’s low mileage) then you can use the difference between your final payment and its true market value as a deposit on another PCP contract car.Learn more about PCP