Guide to Car Leasing – part 6 of 7
Personal contract purchase is emerging as a popular alternative to new car leasing and hire purchase as it offers flexibility and low monthly payments.
How personal contract purchase works
With a personal contract purchase (also known as 'PCP') you have the option to either pay a final lump sum payment to own the car or alternatively return the car, as you can with a car leasing plan. This offers real flexibility as you can evaluate the car at the end of the contract period and decide if you want to own it or would prefer to look for something else.
PCP also allows you to purchase a vehicle with lower monthly payments. This works through a process known as guaranteed future value (GFV), which defers the total cost of the vehicle to the end of the contract. The guaranteed future value is subtracted from the cash price of the vehicle and your monthly repayments are based on the balance. Consequently, you only pay the difference - securing you significantly lower monthly payments.
You're then left with a number of options at the end of the contract period: to return the vehicle; to keep the vehicle by paying off the GFV; part exchange the vehicle for the next new vehicle you want; or sell the vehicle privately, which allows you to keep any value above the GFV. The latter is not an option with every company.
Advantages of personal contract purchase:
- Ideal for those who like to change their car regularly.
- Real flexibility - you can keep the car, sell it, part-exchange or just give it back.
- Road tax is usually included for at least the first year and normally for the life of the contract depending on if you choose to add a maintenance option.
- Lower monthly repayments with the minimum guaranteed future value.
- No chance of negative equity.
- You can have a car from new that you might not otherwise be able to afford.
Disadvantages of personal contract purchase:
- You must carefully calculate the annual mileage before determining the guaranteed future value or you could be stung with penalty charges.
- You are effectively driving someone else's car until the end of the term.
In part seven we will look at where you should go for car finance.
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