Personal Contract Purchase

Personal contract purchase (PCP) is the most popular form of vehicle finance in Britain. Public awareness of contract hire means leasing is rapidly catching up, but many people seem to be sold on the PCP model of paying monthly for a vehicle and then having the option to own it even though they rarely make that final payment.

So why is it that so many people opt for PCP and what are the pros and cons of doing so?

PCP Personal Contract Purchase

What is Personal Contract Purchase?

Broadly, personal contract purchase is the same as a personal contract hire agreement – but with one key difference.

At the end of the contract, there is an optional ‘balloon’ payment that the individual can choose to pay in order to take ownership of the vehicle. This amount is determined at the outset and allows the driver to keep the vehicle if they are happy with it. However, if you would rather change vehicle you could choose to return the car and walk away.

Monthly payments are based on the deposit amount and the difference between the retail value of the car and the residual value (the estimated future value of the vehicle after depreciation is taken into account), plus a bit of interest. Therefore, the more the vehicle holds its value, the better your personal contract purchase deal will be as that will reduce your monthly payments.

A mileage limit will apply to all PCP deals. This is because the leasing company will use the mileage limit to determine the vehicle’s depreciation and therefore its residual value. It’s important to be honest with the leasing company about how much travelling you are likely to do – exceeding the mileage limit will lead to financial penalties at the end of the agreement.

PCP is seen as a direct alternative to the traditional hire purchase (HP) agreement and is subject to the protections set out in the Consumer Credit Act.

What are the pros and cons of Personal Contract Purchase?

There are many advantages to personal contract purchase including:

  • Fixed prices – You know exactly what you have to pay each month, which can help you set and keep a budget.
  • Refinance – If you prefer, you can refinance the balloon payment at the end of the term.
  • Flexibility – you can choose to keep the car or exchange it for a new one.
  • Maintenance packages – Some personal contract purchase agreements may include maintenance packages that can range from basic servicing to total vehicle management.
  • Driving a new car – Newer cars tend to be more fuel-efficient and cheaper to run, as well as safer.
  • No depreciation concerns – It’s not necessary to buy the car at the end of the term and so you can still choose to walk away without re-sale concerns.
  • Access to more ‘upmarket’ vehicles – One of the key elements of a personal contract purchase deal is that it gives you access to previously unaffordable vehicles due to the low deposit and low monthly payments.

However, there are disadvantages, too:

  • Could be expensive – If you plan on returning the car at the end of the PCP agreement, rather than paying the ‘balloon’ payment, you might find contract hire a cheaper method of finance.
  • Maintenance – The car must be maintained to the highest standards, especially if you intend to give the car back at the end of the deal.
  • Mileage limit – PCP deals are subject to a mileage limit, and exceeding that limit could incur a hefty penalty payment.
  • Road tax – Unlike contract hire deals, PCP deals do not include road tax (or Vehicle Excise Duty, to give it its proper name).

Who is personal contract purchase right for?

Those who wish to own a vehicle at the end of their agreement. Overall, personal contract purchase will generally be more expensive than traditional contract hire and hire purchase deals, but monthly payments remain low and affordable. If you travel fixed distances and have a stable lifestyle, the mileage issue should not be a problem.

Consequently, personal contract purchase deals are well-suited to people who want to drive a car that would otherwise be unaffordable and who want to keep their options open with the right to buy.