Personal Contract Purchase Explained
By DavidWhat is personal contract purchase (PCP)?
Personal contract purchase (PCP) is a vehicle finance agreement available to individuals (i.e. not businesses). After an a initial deposit and a series of monthly payments which effectively cover the vehicle’s depreciation, this type of lease gives you the option to purchase the vehicle or return it to the finance company at the end of the agreement.
With PCP, the monthly finance payments are not subject to VAT, although if an optional service package is taken, VAT is payable on the service costs.
How could it work for you?
If you lease a car on a PCP basis, you will be required to pay an initial deposit, followed by a series of monthly payments for the duration of your agreement – 24 or 48 months, for example. These monthly payments effectively cover the vehicle’s depreciation. As such, when your agreement comes to an end, there is still an outstanding amount of money due to be paid – known as the balloon payment. You can either choose to pay this amount and own the vehicle, or not pay it and return the vehicle to the lease company.
At the start of your contract, an agreement will be made as to what the car will be worth at the end of the contract – the minimum guaranteed future value (or MGFV) – otherwise known as the balloon. The monthly payments are the cost of the vehicle after the MGFV and the value of your deposit have been deducted.
It is worth noting that personal contract hire is often more popular and common than personal contract purchase. This is because they offer more flexibility at the end of contract term than a personal contract purchase agreement.
If you’ve got further questions about which type of lease contract is best for you, take a look at the information we’ve provided on each of the different contracts. Alternatively, give our team a call on 0345 811 9595.
The key features of personal contract purchase
- A minimum guaranteed future value (MGFV) – or balloon payment – is agreed at the start of the contract
- Fixed monthly payments cover the rental of the vehicle, plus any maintenance options if chosen, throughout the duration of the contract
- The monthly payments are calculated by taking the following into consideration:
- The cost of the vehicle
- The contract period
- Agreed residual value to be paid at the end of the agreement
- Mileage allowance (as chosen by you before the start of your contract)
- Any additional options, such as a maintenance package
- At the end of agreement, when all payments have been made, ownership passes to the customer – if you choose to not return the car
- Vehicle road tax is provided for the first 12 months of the contract
The key benefits of PCP
- Low initial rental
- Fixed rentals for the whole package, making budget planning easier
- Flexible terms to meet your personal finance requirements and driving habits – with variable contract duration and mileage terms
- Maintenance of vehicles can be included in the monthly fees, spreading the cost
- The finance company guarantees the resale value of the vehicle at the end of the agreement for a known and fixed amount – no risk of negative equity
- Ownership passes to you at the end of the agreement, if you choose it to, once all payments have been made
- Allows you to drive the car of your choice without the risk – if you’re happy with the vehicle at the end of your contract, you can choose to keep it. If not, or there’s another car you’d like to try for a few years instead, you can simply hand the vehicle back
“Personal Contract Purchase remains the most popular form of car finance, yet four out of five people do not take up the option to purchase. If you're not looking to own the vehicle at the end of the contract, other types of finance may be more appropriate.”
What happens at the end of the contract?
At the end of the contract, you have three options:
- Hand the vehicle back to the leasing company (and therefore do not pay the balloon payment)
- Pay the balloon payment outright and own the vehicle
- Refinance the final rental amount if applicable, subject to credit – that means pay the balloon payment in monthly instalments. At the end of these payments, you own the vehicle
You do not need to decide which option is best for you until towards the end of your leasing contract.
We offer a huge range of brand new cars available to lease. Visit our homepage to search our catalogue, or check out our best car deals.
We also offer various leasing services to our customers, such as Used Car Leasing or In-Stock car Leasing.
NB: Nationwide Vehicle Contracts are specialists in Contract Hire and Personal Contract Hire agreements. While Personal Contract Purchase agreements are no longer available with Nationwide Vehicle Contracts, it is important that you review the benefits and exclusions of every lease contract to better understand which agreement is best suited to your needs.
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