Personal Contract Purchase

Personal Contract Purchase, also known as PCP, is a popular way of
financing a vehicle and is usually based upon a hire purchase (HP)
agreement. The main difference is that the vehicle’s value at the end of
the agreement is calculated at the start and is then deferred. This is
referred to as the Guaranteed Minimum Future Value (GMFV) and is based
various factors including the starting mileage, the users projected annual
mileage and its age. The GMFV is fixed for the term of the agreement.
Deferring the GMFV to the end of the agreement in this way means that your
regular monthly payments are lower than those on a HP agreement over the
same term.

At the end of the term, a PCP agreement allows the user to decide whether
to pay the GMFV to own the car, or return the car to the lender with
nothing further to pay provided the user has not exceeded the projected

Under a PCP agreement, monthly instalments are based on the amount borrowed
minus the GMFV. This will result in lower monthly instalments than a
standard HP agreement over the same term.

You have three options at the end of the agreement:

  • You can either pay the GMFV and own the car outright
  • Trade the vehicle in by using any existing equity as a deposit for a new finance agreement (provided the market value is more than the GMFV)
  • Hand the vehicle back (charges are applied if you have driven the vehicle for more miles than was agreed at the start of the agreement or the vehicle is not in an acceptable condition)

Benefits of Personal Contract Purchase

  • Flexible deposit options at the start
  • Lower monthly payments than hire purchase
  • Fixed monthly payments throughout the term of the agreement
  • Choices at the end of your agreement

Things to consider

  • A PCP agreement could work out more expensive overall than a hire purchase agreement for an equivalent vehicle, this could be the case if you choose to enter into a second finance agreement to pay the deferred future value of the car at the end of the first agreement
  • If you decide to return the vehicle, make sure it is in good condition as you could be responsible if it is not
  • Make sure you estimate your annual mileage with care as there will be charges for additional miles above the amount agreed

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