Spreading the cost of purchasing your car
If you’re a person who prefers to change your vehicle at regular intervals and you’re after low monthly repayments to suit your budget, then new or used car PCP could be a solution that suits you. It can provide a flexible, stress-free deal.
The following is a basic breakdown to help you see if PCP is the most suitable car finance option for you.
What exactly is PCP?
In short, a PCP car finance deal is just a loan that allows you to buy a car. The difference is you won’t pay off the total value of the car and by the close of the deal, unless you decide to make an additional payment, you will not own the vehicle.
PCPs break down into three important parts: the deposit, the amount you borrow and the balloon payment.
Normally around 10 per cent of the car’s retail price is requested by dealers as a deposit when they offer PCP finance. The more sizeable your deposit, the less you will need to borrow.
The amount you borrow is based on what the finance company expects the vehicle to lose in worth over the time period covered by the deal, with the deposit you put down subtracted. During the term of the deal, you will pay this amount off as well as interest, so you are never paying off the total value of the vehicle.
If you wish to purchase the vehicle at the end of the deal you will need to make a balloon payment.
How does PCP work?
You pay a deposit to the dealer or finance company. You then pay instalments of fixed monthly payments throughout an agreed term of between 12 and 60 months, depending on the terms of your particular deal (24 or 36 months are the most common options). At the close of this term, you’re faced with a choice of either making a balloon payment and claiming ownership of the vehicle or returning the car subject to it fulfilling mileage requirements and being in good working condition.
Your PCP finance deal is finished, what happens next?
At the close of your deal, you can decide if you want to keep the car. You have three possible options at your disposal:
Firstly, you can purchase the vehicle by settling the balloon payment. On paying this figure, you claim outright ownership. An additional fee of up to £500 may be added by finance companies.
Secondly, you can choose to return the vehicle and walk away. Unless the vehicle is in poor condition or you’ve overstepped the mileage limit, there will be nothing left to pay.
Thirdly and most commonly, you can acquire a new vehicle. By the end of most PCP deal terms, vehicles will have a slightly higher value than the balloon payment. When this occurs, the dealer will offer you the opportunity to use this equity for your deposit on a brand new vehicle.
You’ll be unable to claim the remaining equity in cash unless you first purchase the vehicle via a balloon payment and then go on to sell your car.
If the car has lost more in terms of worth by the close of your PCP deal than predicted, you can simply return the vehicle and let the finance company cope with the incurred loss in value.
PCP deal charges faced on returning or trading in vehicles
Although there are costs you can accrue payable at the close of the deal, they are both possible to avoid. These costs fall into two categories.
A charge for over stepping mileage
When your PCP finance deal begins, you’ll be asked to state what distance you’ll be driving the vehicle each year. Through this information, the dealer will calculate as accurately as possible what the car’s value will be by the close of the deal and this will enable them to set your monthly payments, as well as the balloon payment. A vehicle that has been used lightly will be worth far more than one that has racked up a lot of mileage.
It’s vital to be accurate. If you overstep the agreed limit for mileage, the finance company will place a charge of between 7p to 10p on every mile you exceeded the limit by. Keep an eye out for this as an extra 2,000 miles will equate to a charge of around £200 at the close of your PCP deal.
A charge for damage beyond wear and tear
Like any car rental agency, the finance company will check your returned vehicle for signs of damage. Although you’re allowed a certain amount of wear and tear from use, the vehicle must be in a condition fit for resale. This means that you’ll be required to cover the cost of any obvious damage or dents in the car that will impact on its value.
You can avoid these additional costs at the close of your deal by agreeing a practical mileage from the outset of your deal and by fixing any damage yourself at an approved repairer before you return the car.
PCP deals can be an effective way to finance a new car. If you would like further information or advice about this type of deal, don’t hesitate to contact our team. We will be happy to answer your questions and help you to make an informed decision on this important topic.
