Buying a car: Is personal contract purchase the right option?

Figures out last month from the Finance and Leasing Association showed that more than a quarter of a million new car buyers used dealer finance to fund their purchase in the first six months of this year. That means almost half of drivers currently prefer this sort of borrowing to using personal loans or savings, with the majority of these now turning to personal contract purchase (PCP) deals rather than the more traditional hire purchase agreements.

What is PCP?

A PCP requires the customer to pay a certain amount for a set contract period of somewhere between 24 to 48 months. You have the right to drive the vehicle, but the funding company will retain ownership of it until the contract expires.

This is much like a hire purchase, with the main difference being that you can choose to pay a substantial fee at the end to keep the car, waiver the deal at the end or ‘roll’ on to a new deal with a new car.

Is it the right option?

PCP lending can be a good option if you like to change your car regularly – say, every three years. It works on the basis that you never actually own the car during the period of your loan.

As well as the flexibility of this sort of deal being attractive to some people, it also offers a hedge against depreciation in the form of the Minimum Guaranteed Future Value (MGFW) figure, or balloon payment.

This is a figure intended to calculate the effect of depreciation and will be the minimum you will have to pay at the end of the deal if you want to buy the car. If you choose not to, you can use the difference between this value and the actual value of the car as a deposit on another. Alternatively, if the car depreciates beyond this value, your dealer should soak up the loss.

Before signing up to a PCP agreement, it’s important to remember a few things:

* Check that any PCP deal you take is properly regulated and thus covered by the Consumer Credit Act 1974. This means that, if your circumstances change and you need to exit the deal, you will be entitled to do so as long as you have equalled 50 per cent of the total amount payable and return the car. If your contract is unregulated you could well find yourself trapped with relatively little legal recourse.
* There may also be certain charges involved that you need to be wary of – for example, if you go over the agreed mileage during the term of the contract. Make sure you are confident of meeting all the terms and check on any additional charges before signing.
* Simply put, it may not be the most cost-effective option available. For example, at present, you can find an unsecured loan of between £7,500 and £14,999 at 7.8 per cent typical APR through Confused.com*. It’s not likely that any forecourt deal will be as competitive as this, while an unsecured loan could well offer even an even greater saving. Of course, you’ll also own the car from day one, so it’s worth weighing up the pros and cons of all available forms of finance.

Most importantly, it’s key to shop around, whatever finance options you’re choosing. Don’t feel pressured into taking a deal on the day from a particular showroom if you aren’t 100 per cent happy. A dealer may tell you that their offer is only available for a certain time, but more often than not that will simply be a way of pressuring you into buying.

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