Are PCP offers worth it?

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Personal Contract Purchase (PCP) is a great way to spread the cost of owning your next car in monthly payments over a number of years. It is one of the most popular forms of financing in the UK due to lower monthly payments and more flexible options.

You may be wondering if PCP auto financing is for you and what the pros and cons are. The guide below will help you decide if PCP is the best option for your circumstances and the criteria you need to meet in order to be approved.

Car dealer persuades a customer

How does PCP engine financing work?

Personal contract purchase is a type of secured loan that is usually spread over 1-5 years. This allows applicants to borrow an amount to cover part of the cost of their chosen car. This is why payments tend to be lower than other options.

The loan is secured against the vehicle which means it belongs to the finance company until you pay the final ‘balloon payment’. PCP car finance transactions give the customer more flexibility and they have 3 options at the end of the contract, they can choose to:

  • Return the car to the dealer and the agreement is terminated
  • Use the resale value of the car on another car with a new PCP agreement.
  • Pay the final balloon payment and keep the car.

What are the benefits of PCP car financing?

There are a number of benefits that make PCP transactions suitable for a wide range of people and attractive to car buyers.

  • Low monthly payments. The monthly payments you make do not cover the cost of the car, but rather go to the depreciation of your vehicle over its term.
  • Low rate car financing. PCP transactions often benefit from low interest rates that are fixed throughout the agreement.
  • New and used cars. PCP can be used to finance both new and used cars. Used cars on PCP can be even cheaper due to less depreciation.
  • More flexibility. You do not have your own car at the end of the agreement and have more options available than other financial transactions.

Engine financing via PCP

Are there any disadvantages to getting a car through PCP?

The benefits listed above are good selling points for buyers, but PCP does not suit everyone and there are a few things you should be aware of when applying.

  • Big balloon payment. This can be expensive if you want to own the car at the end of the deal. The balloon payment covers the rest of the cost of the car, and it can be quite large.
  • Mileage costs. At the beginning of a PCP agreement you will set an annual mileage limit and you may face additional costs at the end of the agreement if you have exceeded it.
  • Damage costs. You will also be required to agree to keep the car in good condition. Most PCP cars end up back at the dealer, so they require you to take care of the car and you may face additional costs for excessive wear and tear.
  • Not suitable for bad credit. If you have a low credit score, you may face high interest rates on PCP transactions. People with good credit scores usually get the best rates on PCP transactions.
  • You can not change or sell. Until you make the final balloon payment, you own the car, so that means you can not make any changes to the car or sell the car beforehand.

PCP vs HP – which is better?

Another popular form of car financing is hire purchase when you want to take out a loan. PCP is technically a form of hire purchase, but rather covers the cost of the entire car.

Rental purchases are usually also over 1-5 years, but the monthly payments tend to be higher. This is because the loan is equal to the full cost of your chosen vehicle.

HP can be simpler if you make all the monthly payments and then when you make the last payment, the car is yours to keep.

HP may be more suitable for people who want to own the car at the end of the deal or are struggling with bad credit. HP can be good for people with and credit as it is a form of secured loan. This means that the lender can use the car as collateral, should you not comply with the repayments. There are also no mileage or damage costs associated with hire car financing.

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