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THIS WEEK, A reader asks: What, if any, are the benefits of PCP finance compared to a hire purchase agreement?
The answer: Personal contract purchase (PCP) and hire purchase (HP) are the two types of finance you will most likely get offered when buying a car.
Hire purchase agreements:
These split the cost of a car into a deposit and monthly repayments over a set number of years, with interest added. The size of each monthly payment depends on the price of the car, the amount of the deposit and over how many years you will make the payments.
If you have a smaller deposit and want to pay the car off sooner you will have larger monthly payments. If you pay a large deposit and spread the payments out over a longer period, you can keep the monthly payments low. But remember, the longer you are paying off the car for, the more interest you could be paying. You may also end up with an old car that is expensive to maintain and perhaps harder to sell on too.
However, as soon as you make the last payment the car is yours to do with as you please.
Personal contract purchase (PCP) agreements:
These are a little more complicated. When you have chosen the car you want to buy you agree on a mileage limit that you will not exceed during the PCP period, which is usually three to five years. Then the finance house will decide on a Guaranteed Minimum Future Value (GMFV) of the car. This is how much it will cost you to buy the car at the end of the PCP contact.
The monthly repayments are not paying for this GMFV. When you have made the last payment of the PCP period, you decide if you want to keep the car and pay off the agreed GMFV, hand it back, or trade it in against another car by the same brand.
With PCP you are restricted to a set number of kilometres and if you go over this you are charged a fee – but only if you are planning on handing back or trading in the car. You also have to keep the car well maintained and usually service the car at dealer-approved garages.
If you don’t have a large deposit and need to keep monthly repayments low, then PCP can be a good way of getting a car that you may not otherwise be able to afford, as deposits can be as low as 10 per cent. You can then work toward saving the GMFV amount if you plan on buying the car at the end of the PCP contact.
If you trade in the car for a new one, you use any equity you have built up in your monthly repayments and the difference of the GMFV as a deposit on the next car. If this is less than the deposit of the new car then you will have to add to this to make up the difference. This is a great way of staying in new vehicles but you will be restricted to the one brand, so choose one you really love. This will help cut down on costs associated with maintaining and running older vehicles and NCT tests.
Also, with PCP, if at the end of the contact the car isn’t worth the agreed GMFV you can just hand the vehicle back to the finance company and it sucks up the loss. However, this means you’ve essentially rented the car for the duration of the PCP contract – so you’ll have no car and no deposit to show for the payments.
So, which one is the best for you?
It depends on your current financial circumstances. If you have or can save a decent size deposit for a car and can afford to make payments large enough that you aren’t paying for a very long time, then perhaps HP is the way for you.
If you can’t save a large deposit, can only afford small monthly payments and don’t mind sticking with the one brand of car for a while then perhaps PCP is the way to go.
Don’t forget you could also look at taking out a Credit Union or bank loan, as this could well work out cheaper in the long run.
Either way, make sure you do your sums, read the small print and try and choose the finance option that gives you the best deal on total amount payable – and the best options for your circumstances.
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