If you`re in the market for a new car, you may have come across the term “personal contract purchase” or PCP. But what exactly is it, and is it the right choice for you? In this article, we`ll dive into the details of personal contract purchase for cars.
What is Personal Contract Purchase?
Personal contract purchase, or PCP, is a type of car finance that allows you to spread the cost of a car over a set period. With PCP, you are essentially leasing the car for a set term, usually between two and four years, with the option to buy the car at the end of the term if you wish.
How Does PCP Work?
PCP works by dividing the cost of the car into monthly payments, similar to an installment loan. However, unlike an installment loan, you are not paying off the entire cost of the car. Instead, you are paying for the depreciation of the car over the term of the agreement.
At the end of the term, you have three options. You can return the car to the dealer, pay the balloon payment to own the car outright, or use any equity in the car towards the cost of another car.
What Are the Advantages of PCP?
One of the biggest advantages of PCP is that it allows you to drive a newer car than you might be able to afford if you were buying outright. This is because you are only paying for the depreciation of the car, not the full value.
Another advantage of PCP is that you have the option to buy the car at the end of the term. This can be a good choice if you have grown attached to the car, or if it has held its value well and you can sell it for a profit.
Finally, PCP can be a good choice if you like to change your car often, as you can simply return the car and start a new agreement.
What Are the Drawbacks of PCP?
There are some drawbacks to PCP that you should be aware of before signing an agreement. One of the biggest drawbacks is that you are essentially renting the car, and you will not own it until you make the balloon payment at the end of the term.
Another potential drawback is that there may be restrictions on how much mileage you can put on the car during the term of the agreement. If you go over the agreed mileage, you may have to pay extra fees at the end of the term.
Finally, if the car does not hold its value as well as expected, you may find yourself in negative equity at the end of the term. This means that the car is worth less than the balloon payment, and you will have to pay the difference if you want to buy the car.
Is PCP Right for You?
Whether or not PCP is the right choice for you will depend on your individual circumstances. If you like to drive a newer car, but don`t want the commitment of owning it outright, PCP may be a good choice. However, if you prefer to own your cars outright, or if you plan to put a lot of miles on the car, PCP may not be the best choice for you.
Overall, PCP can be a good choice for those who want the flexibility of leasing a car, but also want the option to buy it at the end of the term. If you`re considering PCP, make sure to read the fine print carefully and understand all of the potential costs and restrictions before signing an agreement.