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The pros and cons of Personal Contract Plans (PCPs)

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Personal Contract Plans are not suited to everyone, so study what’s best for you, writes Geraldine Herbert

An increasingly popular way to finance a new car is under a Personal Contract Plans (PCP). But what exactly is a PCP and who is it best suited to?

Nearly all car manufacturers now offer PCPs. Under this type of scheme the repayment schedule is split into three very distinct parts.

First, a deposit is paid – usually 10% – 30% of the cars value. This is either paid in cash or if you already own a car, you can trade this in for part or all of the deposit, depending on its value.

The car dealer then estimates what the new car will be worth at the end of the contract this is called a guaranteed future value and is essentially a forecast of the car’s value after depreciation. The figure put on the value of the car at the end of the contract is likely to be set conservatively;  if it is set too low you will be paying higher monthly instalments to compensate but if it is set too high you will have lower payments but it reduces your chance of any equity at the end of the agreement.

The monthly repayments are the calculated by deducting the deposit and the guaranteed future value from the selling price.

 At that end of the contract you have three options

  1. You can hand back the car at no extra cost subject to the agreed terms and conditions.
  2. Start a new PCP deal and use any equity in the car (if the car is worth more than the value put on it at the start).
  3. You can pay off the “guaranteed future value” to buy the car.

So, for example, if your car costs €22,000 and the dealer estimates its value after three years as €10,000, you would make repayments on a €12,000  minus the deposit plus interest on the  loan.

At the end of the three-year term, you can pay the €10,000 and take the car, give the car back and owe nothing, or start a new PCP on another car. The theory is that these arrangements allow drivers to afford new cars more frequently.

In some cases you can use the equity in the car to act as a deposit for a new PCP deal and get a new car via this method every few years. So, for example, if the final payment is €9,400, but the car is actually worth €10,600, you have €1,200 in equity to use on another PCP

PCPs are similar to a hire purchase agreement in that you can avail of the half rule, The ‘half rule’ means you can end the PCP agreement at any time and return your car. If you have not howver, at this point in the agreement paid half the purchase price you will owe the difference between the repayments you have made and half the purchase price.

The benefits of a PCP are low monthly repayments, rates for car finance are usually more competitive because some car manufacturers, such as VW, Renault and BMW, run their own ‘banks’ specifically to lend for car purchases, while others have pre-agreed packages with the major banks. Some makers even offer 0pc finance. The other major advantages are  you get new car every three years, deposit rates are as low as 10% and a you have  a choice of what to do at end of repayment term. There are however downsides and if you do not keep up the payments the bank can, and will reposes the car. The car must also be returned in good condition so you may be charged for any scratches or any damage or if you have a crash and the cost of the repairs is greater than 66% of the original list price then you may also not get the minimum value you were hoping for. Other things to look out for are;  high mileage could mean a lower minimum guaranteed value, you may be charged ‘arrangement fees’, typically €50-€150 and it is your responsibility to ensure the car is regularly serviced repaired, etc and you must stick to the mileage condition of the contract, this is usually around 15,000km-20,000km.

Approximately 40% of all cars financed are done with a PCP but the  vast majority of new car buyers are still relying on banks or credit unions to fund their new purchase.

While the monthly outlay is significantly higher than on a PCP the main advantage of a bank loan is that you own the car and therefore you can, if necessary, sell your car to repay the loan should you fall behind on your repayments.  A Credit Union loan affords further flexibility as there are no hidden fees, admin charges, transaction charges, set up costs or balloon payments plus you can pay off your loan early, make additional lump sum repayments or increase your regular repayments, without a penalty.

When you are buying a car give your car finance options at least as much consideration as the car and ensure the choice you make is the best one for your circumstances.

Geraldine Herbert

4th July, 2016

Author: Geraldine Herbert

Contributing Editor and Motoring Columnist for the Sunday Independent and editor of wheelsforwomen. Geraldine is also a regular contributor to Good Housekeeping (UK) and to RTÉ Radio One, Newstalk, TodayFM and BBC Radio. You can follow Geraldine on Twitter at @GerHerbert1

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2 Comments

  1. Am I correct in assuming that there is a serious disadvantage in the example that you have provided on the above PCP, even though you have perfectly described the PCP contract.
    At the start of the deal you have equity to the value of somewhere between 10% to 30%. You make repayment to a value of a further 30%. As you describe the advantage of low repayments seems great. Too good to be true.
    That is exactly what it is. The PCP works on the basis that there are low monthly repayment and it offers a guaranteed value at the end of the contract. great. What it fails to tell you is that your ownership of the car is also dropping. The initial ownership of 30% drops to about 5% (€1200). What is really happening during the PCP contact is that your initial deposit is being eroded over the life time of the product.

    I would suggest if your monthly repayments do not match the deprecation in the car, then over time you are losing equity in the value in the car.

    Regards

    Martin

  2. Hi Martin, thanks for the comment – I would argue that PCPs are not about equity in the car, if you are intending on buying a car then a PCP is not a good option you would be far better getting a loan and spreading payments over the three years. With a PCP all you are paying off is the depreciation on the car over the duration of the contract, you are not buying the car so yes you need to be careful about how high a deposit you put down. It is also worth noting however you decide to finance a new car, cars depreciate rapidly and will lose half their value in the first three years.

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