An emerging trend in car finance has been the introduction of Personal Contract Plans known as ‘PCP’.
PCP is a form of asset finance which has been available for many years, and also a form of Hire Purchase. Some PCPs offer attractive deals, including 0% finance, but specific terms and conditions apply to a PCP, and it is important those entering into a PCP clearly understands the relatively complex contract involved.
PCP is a lease scheme which makes financing a car purchase seem affordable with low monthly repayments and a typical term of 3 to 5 years. A deposit is required up front, generally between 10% and 30% of the purchase price of the car. The deposit can be financed by your existing car and cash if car value is insufficient.
The PCP agreement calculates the “GMFW” Guaranteed Minimum Future Worth of the car being purchased. This is the value the finance company deem the car will be worth at the end of the PCP term, and it takes into consideration annual mileage, frequency of servicing and condition of the car.
After calculating the deposit and the GMFW, the depreciation of the car remains, and this is the value which will be spread over the term of the PCP.
At the end of the PCP the buyer is left with three options: