Make sure you choose the method of car finance that suits you best
PCP finance has become one of the most popular forms of car finance with approximately one-third of new cars bought using this type of finance. PCP finance is also increasingly used to finance second hand cars. PCPs usually involve low monthly repayments and a relatively quick approval process on the garage forecourt.
Research published in the Competition and Consumer Protection Commission’s (CCPC) PCP report, showed that these products are complex and consumers can find it difficult to understand how they work, particularly at the end of an agreement. In the run up to the sale of new ‘192’ registered cars, the CCPC is running an information campaign to help consumers understand PCPs so that they can make informed decisions on what is best for their circumstances.
Áine Carroll, Director of Communications and Policy in the Competition and Consumer Protection Commission said; “PCPs are significant long-term financial commitments. The complexity of PCP products, coupled with the value of these agreements, means that it is extremely important that consumers understand what they are signing up to. This can only happen when consumers understand how the product works.”
‘Five things to think about before signing a PCP contract’
1. PCP finance is not like other types of car finance
A large part of the cost is deferred until the end of the agreement. This means that monthly repayments are lower than they would be using a traditional loan or hire purchase. If you are considering PCP finance, it is important that you do not focus entirely on the affordability of the monthly repayments but consider the full price of the car (including running costs) and what you intend to do at the end of your agreement.
2. Consider at the start what you want to do at the end
The complicating feature of PCPs is that, at the end of the agreement, you have three options: to pay the Guaranteed Minimum Future Value (the lump sum at the end), hand back the keys or start a new PCP agreement for another car. Your intention at the end of the contract is extremely important. For example, if you intend on buying the car outright at the end, you may need to save up the lump sum. Or if you intend on trading in the car, you will need to keep within certain mileage limits and ensure the car is maintained to agreed standards – and adhering to these requirements is also important if you plan on starting another PCP at the end of the agreement. It is important to know that you may not be able to end your contract early should your circumstances change.
3. Remember you do not own the car until the last payment
Unlike paying for a car with a loan from a bank or a credit union where you own the car straight away, with PCPs you do not own the car unless you pay the lump sum at the end of the agreement. This has practical implications such as, you cannot sell the car without the permission of the finance company.
4. If you want to roll your contact into a new one
At the end of a PCP, if you intend in trading in your car for a newer model you will need to pay a deposit for your new car. There may be equity in your current car, if at the end of the term the Guaranteed Minimum Future Value is lower than the market value of the car. This equity can be used as a deposit for the new car. Factors such as the condition of the car or changes in the second-hand car market can impact on the market value and so you should not take equity in the car as guaranteed to cover the deposit for a new car.
5. A PCP can affect your credit rating
Like any loan, your PCP finance will appear on your credit history. This means that if you apply for a mortgage or any other type of credit, the value of the full PCP will be taken into account when lenders are assessing a credit application. And like any credit agreement, if you miss payments on your PCP, that will be recorded on your credit history which may impact on your ability to borrow in the future.