PCP Contract Guide

There are a sea of advertised “personal contract deals” on the internet and manufacturers often have their own personal funding schemes that are called a number of different (and sometimes quite confusing) names.
All of this, to be honest, doesn’t really help the consumer. It is important to understand what agreement you are actually entering into; there is a big difference between traditional finance agreements, contract hire and personal contract purchase or personal contract plans.
The latter two are commonly referred to as PCP and this is very different from PCH (or personal contract hire).

What is PCP?

A good PCP plan will give the buyer the best of both worlds – contract hire has one option only at the end of the contract and that is that you have to hand the car back. PCP allows you to purchase the vehicle at a pre-agreed (and usually favourable) final figure.
PCP is a relatively new form of funding and is essentially a form of lease purchase – it is a finance agreement that offers the buyer the protection of the guaranteed end value figure that hire purchase with a balloon does not (it is also subject to the consumer credit act).
Usually, PCP agreements are taken out over three years but two and sometimes even four year terms can be agreed.
PCP usually requires a low deposit which is typically three or six months in advance. A monthly payment is then made until the agreement comes to the end, when the customer can choose to buy it or hand it back.

PCP Mileage

Your plan will be calculated based on your estimated annual mileage; the finance company will predict how much the vehicle should be worth in the future and set the end value around this figure. It is most usual for the funder to set the end figure below the actual prediction to try and ensure equity (if the mileage limit is adhered to and if the vehicle is looked after as it should be).
This is not just designed as a “perk” for the customer but also as a safeguard for them – after all, if the car is handed back with un-predicted negative equity then it is the finance company who will have to foot the bill.
If the customer does go “over mileage” then excess mileage charges will apply if the car is given back, but these charges are calculated at the start of the contract (so you know what they are likely to be) and are also commensurate with what the vehicle is likely to lose if the mileage is exceeded. In other words, it is not really fair to call them “penalties”.

PCP End of Contract Options

Remember also that if you choose to buy the vehicle, you won’t have any excess mileage to pay at all. However, your car will be worth less as a result of the mileage you have driven so it is always worth weighing up both options before deciding what to do at the end of the contract if you have driven over-mileage.
If the customer chooses to buy the vehicle, it can be refinanced or even used as a part exchange against another vehicle if so wished (and of course, if the equity in it dictates this is a financially viable prospect).

Summary

Choosing a Personal Contract Plan over a Personal Contract Hire agreement is a more flexible agreement and if you secure a competitive PCP deal, a similar monthly payment can be achieved.
PCP also gives the customer the opportunity to take out maintenance contracts if they wish so that they can really fix the cost of their motoring for the term of the agreement.
If you are looking at it as an alternative for Hire Purchase then this is a different matter as if you are planning to keep it, the total repayments can work out more. But as an alternative to PCH, PCP really does offer you the best of both worlds.
Editor’s note: To find out more about personal contract plans, contact the expert team at Compass Contract Hire who will be happy to advise you and provide you with a personalised quotation on the car of your choice.

Written by @MotorMistress
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