This is often known as its "guaranteed minimum future value". As you're effectively only renting the car from the finance company, you don't own the vehicle while you're making your monthly payments. You also won't automatically own the vehicle at the end of the payment term, unlike with an HP deal.
Personal contract purchase
If you do decide you want to keep the car at the end of the agreement, you'll need to make what's known as a "balloon" payment. This will cover the cost of the vehicle, and it's this payment that transfers ownership from the finance company to you. It's worth noting, in addition to the balloon payment, some finance companies may charge an admin fee if you wish to buy the car at the end of the agreement. This is because your installments are paying off a much smaller amount of money than they would with HP.
How does PCP work?
And, as monthly payments tend to be more affordable with PCP, this often allows people to drive a higher-spec car. However, in reality not many people end up paying this.
And indeed the cost can be prohibitive for some. Instead, most drivers are happy to opt for a new PCP deal at the end of the term, which makes it best suited to those who wish to change their car every few years. Therefore PCP is probably not the best choice for people that wish to actually own their car.
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Because the value of the vehicle at the end of the term is important, so is the condition of the car and its mileage. Therefore it's definitely worth being aware that almost all PCP deals come with an annual mileage limit, which you'll need to agree upon at the outset. If you go over this agreed limit you could end up paying additional charges - which may work out at up to 10p per mile in some instances.
Personal Contract Purchase (PCP)
Your credit history is taken into account when you apply for car finance. But even if you have poor credit, or you're completely new to it, it doesn't mean you'll be rejected. All in all, there are lots of different ways to pay for a new car. And with so many options available most people will be able to find something that fits their needs.
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PCP (Personal Contract Purchase) car deals explained: advantages and disadvantages | Auto Express
By continuing or closing this window you are accepting these cookies. Manage cookies and view our policy. Ideal for: People who want lower monthly repayments and prefer to change cars on a regular basis. The key difference is that the value of the car at the end of the contract is calculated at the start of the agreement and this value is deferred.
This deferred sum is usually referred to as the Guaranteed Minimum Future Value GMFV and is based on a number of factors including how old the car will be at the end of the agreement and how many miles it is expected to have covered. The future value of the car is guaranteed by the lender so will not fluctuate. PCP — also known as Personal Contract Purchase, or Personal Contract Plan — is a type of vehicle finance agreement for individuals wanting to hire a car for private use.
It is a flexible and cost-effective method of financing a new car and has become increasingly popular over recent years. When you apply for a personal contract purchase plan, you will be required to pay a deposit, followed by a series of monthly payments over an agreed period of time.
This is similar to how you purchase a car with a loan, but generally PCP payments are more cost-effective. At the start of the contract, a minimum guaranteed future value MGFV of the vehicle — or balloon payment — is agreed upon. This will identify the minimum amount your vehicle will be worth at the end of the contract. With this in place, you will be protected if your car suddenly drops in value by the time your agreement ends.
It also means that, if your car happens to be worth more, you can use the equity as a deposit on your next PCP deal. The agreed monthly payments you make will cover the cost of the vehicle after the MGFV and the sum of your deposit have been deducted.
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