PCP stands for Personal Contract Plan and is an agreement between you and a financial institution. You agree to pay monthly instalments to essentially lease a car for an agreed financial period, which is usually 3 years, then after the finance term is up, you have 3 options which are outlined below. You must have either a deposit or a trade in to be eligible for PCP financing.
Your 3 options after the finance agreement is up;
- Keep the car and pay the final amount or finance the payment over another number of years, either way you will own the car once the final payment is made. This is known as a ‘balloon payment’ and can often be quite high.
- You can hand back the car and make no more payments. This can depend on the condition of the car and the service history, you will be restricted to having the car only serviced in the dealership that you purchased the car from, the exact stipulations will be explained to you. You will hand back the car and keys to the dealership and you will not owe any money but also not own a car.
- You can trade in the car for another one, the age of the car and the condition will affect the trade in value of the car. If you do decide to trade in your car for another one then the process will start again and you will have to enter into a new contract which will not be the exact same as the last one. You will also have to put down a new deposit for the next car that you finance through PCP.
The Advantages & Disadvantages of PCP
- The monthly payments are often smaller than getting a direct loan for the asset
- A newer vehicle can decrease maintenance and running costs
- You have the option of upgrading to another car and enter a new contract
- You must keep the car in good condition and only service it at the stipulated service station
- There is a mileage stipulation that you must adhere to which can be quite low, usually the lower the mileage limit you agree to, the cheaper the monthly payments will be
- You can’t modify the vehicle as you like
- The final payment can often be quite expensive
- The penalties incurred for damage to the vehicle and going over the mileage limit can be very high
- Once you get into a PCP contract, often people have found that it is difficult to get out of them
- You must put down a new deposit each time you want to upgrade to a new car
Entering a Personal Contract Plan is something that you need to consider carefully before finalising and know and understand all of your options, you must ensure that this option you choose is suitable for you and your situation.
Realistically, nobody knows what situation they will be in in 3 years’ time, will you be able to make the balloon payment at the end of the term to own the car or will you be able to make up the deposit for the next car, is it worth the cheaper monthly payments or would you be better off paying a higher monthly amount but own the car and be done with payments at the end of the term? Will you be leasing a car for the rest of your life, if so, is that practical? It is very important to look at the fine print and know what you are getting yourself into.