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:
- Pay a final “balloon” payment and keep the car
- Hand back the car
- Use the car as a deposit for another car, and enter into another PCP agreement
Things to consider when entering a PCP agreement
- You do not own the car until the final payment is made.
- Should you run into financial difficulty during your PCP agreement, unlike a personal loan, you cannot sell the car to pay off the debt.
- A PCP is secured finance and could result in the repossession of the vehicle for none payment as per terms & conditions.
- Financing the “Balloon” payment at the end of PCP term – will you need to take out another loan?
- Risk of negative equity if the vehicle has excessive mileage or has not been properly serviced.
Credit Union Car Loan Advantages
- With a credit union car loan, you own the car from the outset.
- You can borrow the full cost of the car purchase at your credit union.
- Being a cash buyer because of your credit union loan gives the purchaser bargaining power.
- The interest you pay on the credit union car loan is fully transparent with no hidden fees, administration or transaction charges.
- A relatively straight-forward contract with your credit union by way of a credit agreement.
- No balloon payment at the end of the loan.
- Flexibility, you can pay extra at any time, therefore reducing the duration of the loan and saving yourself interest, as you only pay interest on the loan balance outstanding.
- Your credit union loan is insured in the event of your death (subject to terms and conditions) – at no direct cost to you