Personal Contract Plans (PCP) are a popular way to stretch a budget but there are some things to bear in mind, writes Geraldine Herbert
Car sales are booming with almost 125,000 new registrations in 2015, up more than 30 per cent on 2014, according to figures from the SIMI. Sales so far for this year show similar increases and 2016 is set to be the third consecutive year of growth.
The depressed car market of the past few years has reduced the supply of good second hand cars so when you add in the competitive finance deals, it’s little wonder so many are opting to buy a new car.
One of the most popular ways to finance a new car is through a Personal Contract Plan but what exactly is a PCP and how does it work?
PCP is a form of hire purchase agreement without the balloon payment at the end, instead of buying a car you effectively hire it and at the end of the agreed term, you hand the car back, You pay a deposit (usually by way of trading in your old car) ranging from as low as 10% to as high as 30%. The car company works out the car’s likely value at the end of the contract, the Guaranteed Future Value (GFV).
The amount you repay over the term of the contract is the difference between the price of the car and it’s guaranteed future value. This is the reason that the repayments are lower than on other forms of finance as you are essentially renting the car, what you are paying for monthly is the amount is based on what the car is predicted to lose over the course of the contract, rather than the car’s total price, plus some interest
The guaranteed future value that is agreed is based on a number of conditions including mileage and condition so you need to pay close attention to the small print. Most PCPs come with mileage restrictions and a penalty for exceeding the limit, so you will have to agree an annual mileage as part of any PCP deal. It’s important to get this right as you’ll be charged extra for every kilometre you go over the limit but if you overestimate you will end up paying more for your car than you need to. VW charges excess mileage of 6c a kilometre so you would have to stump up €300 if you ran over by 5,000 miles. You can also be charged if you don’t keep the car in good condition. Some firms even insist on a regular service, often at the dealership.
When your PCP comes to an end (usually after three or four years) you have three choices. You can simply return the car and move on; pay the final, prearranged fee and own the car outright; or trade in the car and, if it’s worth more than it was predicted to be, put the difference towards a new PCP.
Finally it is important to remember your car remains the property of the finance house and can technically be taken from you and sold to pay off the loan if you default on your payments.
Some examples of a PCP over a three-year term
Nissan Micra 1.2
On the road price: €15,395
Finance rate: 7.9 per cent APR.
Deposit: €1,540 (10%)
Monthly repayments: € 272.07
Cost of finance: €2,517.52
At the end of the three years the outstanding balance due on the car will be €6,578
VW Golf Highline 1.6 diesel
On the road price: €28,330
Finance rate: 1.9 per cent APR.
Deposit: €5,666 (20%)
Monthly repayments: €365.95
Cost of finance: €960.20
At the end of the three years the outstanding balance due on the car will be €10,330
Kia Cee’d 1.4 Petrol
On the road price: €19,650.00
Finance rate: 5.9 per cent APR.
Deposit: €5,895 (30%)
Monthly repayments: €240.29
Cost of finance: €1,836.43
At the end of the three years the outstanding balance due on the car will be €6,877.50
BMW 520d SE Saloon
On the road price: €47,060
Finance rate: 3.9 per cent APR.
Deposit: €14,110.50 (30%)
Monthly repayments: €416
Cost of finance: €3,195.29
At the end of the three years the outstanding balance due on the car will be €21,093.79
Toyota Avensis D-4D 112 (1.6) Luna
On the road price: €30,450
Finance rate: 5.9 per cent APR.
Deposit: €6,090 (20%)
Monthly repayments: €434.76
Cost of finance: €3,230.35
At the end of the three years the outstanding balance due on the car will be €11,875.50
Renault Kadjar Expression+ ENERGY TCe 130
On the road price: €24,990
Finance rate: 6.9 per cent APR.
Deposit: €8,359 (30%)
Monthly repayments: €249
Cost of finance: €2,779
At the end of the three years the outstanding balance due on the car will be €10,296
Pros
Use of a new car every three years
Lower monthly payments
Low deposit (ranges from 10% – 30%)
Flexible repayment terms (from 12 to 36 months)
A choice of what to do at end of repayment term
Cons
Depending on the Mileage and condition of car you may find yourself facing penalty charges
Total amount paid may be more than with hire purchase
Have to pay the outstanding balance if you want to keep the car
Geraldine Herbert
10th February, 2016
