These days buying a car is a bit of a headache. There are so many options available to us that it's often difficult to know which one is right.
As such, here at Haynes we have decided to dissect each one and see what it's all about. This time, we're looking at PCP, or Personal Contract Purchase. What is it, and is it better than just going out and buying the car outright?
What is PCP?
PCP, or Personal Contract Purchase, is a type of hire purchase agreement. In a nutshell, it's affordable finance. PCP gets the attention of buyers because it seems very cheap indeed.
And on face value, it is. There are many manufacturers that will 'sell' you a car on PCP, a nice car no less, all for what seems like not a lot of money per month.
So how does PCP work?
You walk into the dealership, you have a look at the offers and then you tell the salesman what car you want to buy. He will giddily tell you how you can have the car of your dreams for no much money per month, then you'll sit down and he'll explain the actual costs.
First of all, there is the deposit. In a perfect world, you'll have a car you can part exchange into the deal, and as such, that will cover the deposit side of things.
Without that, you may have to put four figures down in order to secure the low monthly payment that first grabbed your attention.
Some dealerships may well be able to set up a PCP deal with a low, or even no deposit. At the time, this may seem pretty good, and if you want nothing more than to get your bum in the seat of a new car, it is.
PCP deals have become extremely popular for one reason – they get the masses into new cars. And who doesn't love a new car?
The other positives
There are other big positives to going down the PCP route, too. The big one is that the monthly payments stay the same, so you can budget accordingly.
Then there's that low or even no deposit. The big one, however, that beats standard Hire Purchase (a basic loan to pay off the entire value of a car) is what happens at the end of the contract.
When you set up a PCP deal, the dealer and loan company will agree with you, in writing, the GMFV. That's Guaranteed Minimum Future Value of the car.
So as long as you look after the car, resist the urge to paint it pink, and avoid driving it through a wall, you have the car's value, in three years, in writing at the start of the contract.
The biggest bonus here, over a Hire Purchase agreement, is that you're exempt from negative equity – the situation where the market value of the car is less than what you're paying each month. In the motoring world, a fine example of this would be five year 0% APR deals.
They seem great until year three, when you're left with two years to pay back a car that's worth less than those two year payments combined.
What happens at the end of a PCP deal?
You have a number of options. Firstly, you can pay off the GMFV figure, which means you'll own the car outright.
If you want a new car, you can trade yours against one. The security of the GMFV means the dealer will have to honour it, so you'll have an asset of value to trade in.
Or, you could be lucky and end your PCP with a market value higher than the GMFV. So you have more wedge to throw at a new deal.
The final option is that you set up a new PCP or a HP deal on the GMFV figure, extending your loan in the process. At the end of the new agreement, you'll own the car.
Can I be caught out?
Yes, of course you can, but only if you're negligent. The PCP contract will stipulate the miles you can cover over the term of the deal, so if you exceed that pre-disclosed figure, you'll have to pay, on the mile, for anything extra.
If you fail to look after the car, be that by generally beating it up or by failing to keep it serviced regularly and per the manufacturer guidelines, the GMFV may be thrown out of the window.
The dealer is putting trust in you, they expect a saleable car at the end of the term. If you don't deliver, why would they honour the GMFV?
Finally, if you go for a second PCP on the same car, or even a HP after that initial PCP, it can work out to be quite expensive. PCP deals work because they're a cheap way to keep you in a new car.
If you can mentally accept that you'll never own the car, and you're happy to change car every three years for a new one, it's a good deal. But if you try to actually own the car, it becomes costly.
What about buying the car outright at the end of a PCP deal?
The big issue here is the cost. Who has stacks of cash lying about to go and buy a brand new car? Exactly - nobody does. A PCP deal gives you an opportunity to get into a brand new car without having to sell your children.
Of course, a car on PCP is never truly yours. You can't change it, upgrade it or modify it, you can't even service and maintain it yourself. Some people consider it to be a form of long-term rental, trather than owning. But that's not a bad thing, at least not if you want a new motor.