If you have been in a motor dealer in the last 10 years then it is highly likley you have been offered a PCP or Personal Contract Purchase deal on a vehicle. Never heard of it? Well you may have heard of Ford Options, Peugeot Passports or Citroen Elect 3? All these names have been used by car manufacturers for their own particular PCP finance agreement.
Characteristics of PCP
What is a PCP agreement, and why has it come about. Well it has been borne out of necessity really. Motor dealers traditional routes of finance, such as hire purchase, have come up against fierce competition form the direct lenders, and High Street Bank Personal Loan offerings. The Personal Loans have often been at far lower APR interest rates, and can be more attractive to consumers.
So how did Motor Dealers and their finance providers react? They developed a finance product that favoured all parties….the PCP.
How does it work?
Well, traditionally to get the lowest possible monthly instalments on a Hire Purchase agreements, consumers would have to opt for the longest period possible, typically 5 years. This means they could be 5 years out of the car showroom, and this does not suit the motor dealer. It may not also suit the consumer, as with a new car, you would be looking at MOT and increased running costs after 3 years.
The compromise was the PCP agreement. By giving the consumer a Guaranteed Future Value for the vehicle, after say 3 years, it gave them an option to come back in and trade the vehicle for a new one.
There are other options too, you can buy the vehicle for the GFV and own it, or indeed you can simply hand the vehicle back to the motor dealer and walk away with nothing more to pay.
The advantages to the consumer are clear, lots of choices and lower monthly payments.
The advantages to the motor dealer are clear too, a higher customer retantion, due to the fact that only that particular manaufacturer knowns when the customer must make a decision on the vehicle. The motor dealer also gets a nice supply of 3 year old stock for the forecourt.
Other considerations with PCP Finance
Whilst it is great to have such ‘option’ at the end of the agreement, it must be pointed out that in reality the PCP agreement is simply a Hire Purchase agreement with a deferred payment at the end. This means that during the agreement, you are just as financially vulnerable is the vehicle is written off in an accident.
This means that on a PCP finance agreement, a well choosen Gap Insurance policy may be in order. The choices for PCP Gap Insurance is very much dependant on a number of factors. The amount of deposit you put down, the amount of discount you got and vene just you opinion on what you want to cover, can all be determining factor into the choice of Gap Insurance for your PCP agreement.
In general terms you could consider :
Finance Gap Insurance, to clear any outstanding finance.
Return to Invoice to take you back to the original invoice price
Vehicle Replacement Insurance to cover the replacement cost of the equivalent vehicle.
So if you are looking at financing your next vehicle, a claer option is a Personla Contract Purchase agreement. Hope the PCP form of finance is a littel clearer for you now!