PCP (personal contract purchase) is best described as a loan to assist you with buying a car but without having to pay off the full retail value as you would with a standard loan. This means you won’t own the car at the end of the deal unless you choose to make a balloon payment.
PCP suits those who like to change their car every few years and want the option to buy at the end of the term. It’s worth comparing the cost of leasing against PCP if you think you won’t end up buying the car as although you won’t own the vehicle with leasing, the monthly payments are cheaper.
Most dealers offering PCP ask for a deposit of around 10% of the cars value. The larger the deposit you make, the less you’ll have to borrow. To encourage customers to buy new cars, some car manufactures offer a deposit contribution of around £500-£2000 providing you use their finance scheme.
The amount you’ll need to borrow is calculated on how much the finance company predicts the car will lose in value over the term of the deal minus the deposit you put down. For example if they predict the car will lose £5000 over a 24 month term and you put a deposit of £1000 down, then you will pay £4000 for the car plus interest of the whole balance over 24 months. Typical APR’s 4-7%
The balloon payment (the balancing amount you will need to pay to own the car) is also known as a Guaranteed Minimum Future Value (GMFV). This is how much a dealer predicts your car will be worth after the contract ends. Although you agree to this sum at the start, you don’t have to pay it as you get a choice to buy the car at the end of the deal. If you do want to purchase the car then you will need to pay this sum.