Personal Contract Hire: What to Be Aware Of
Deciding to buy a new car is a big decision for most of us. One of the biggest deciding factors for many people is whether or not they want to face the prospect of losing thousands of pounds as the car ages. Vehicles are notorious for depreciating quickly in value - faster than almost any other commodity you can think of, so it's no wonder that there has been a sharp rise in people opting instead for a Personal Contract Purchase (PCP).
What is a Personal Contract Purchase?
Similar to a business lease with an 'option to buy', it was designed with the private individual in mind and is legally recognised as a conditional sale agreement. Anyone taking out PCP is automatically protected by the Financial Services Regulations and the Consumer Credit Act 1974.
A way of buying a new car without paying upfront or having to worry about losing such a large proportion of your money as the car loses value, PCP is a popular way to spread the cost and still drive a brand new car. It allows you to set up a monthly payment and then decide at the end of it whether or not you want to buy the car or not.
The three options available to those in a PCP at the end of the contract term are:
- Hand the car back - but you won't get any deposit or repayments back
- Pay the GMFV* or 'balloon' payment and take the car away
- Use any difference between the actual value of the car and the GMFV and use that as a deposit on your next PCP car.
How Does it Work?
There are several factors that make up a personal contract purchase, and the following list is standard information that you would expect to see explained on any PCP contract:
How Much is the Car to Buy New?
Is it higher than you’d pay if you were buying with cash? If so, then walk away. It's likely that the cost has been bumped up in the hopes that paying monthly will make it look like less spent over time. Make sure the car is costing what you think it's worth and no more.
How Much Deposit is Needed?
The amount you put down may be negotiable and it may also change the terms of your agreement - i.e. if you have an extra £1000 to put down on the deposit, then it might bring down your monthly payments. Make sure any extra you pay is not swallowed up in interest.
What is the Length of the Contract?
This is important - paying a certain amount over 36 months is very different to paying it over 60 months. Read carefully and make sure you understand just how much this is going to cost you in the long run.
The next list is of things that are also very important, but are often not so clear within the contract:
How Many Miles are You Allowed Within Your Contract?
This will be agreed with your contract provider before you make a deal. Try not to underestimate, as once you go over your agreed mileage limit, excess mileage may be charged at a much higher rate. Make sure you know what the limit is and what the penalty is should you go over it.
What is the Minimum Guaranteed Future Value (MGFV)?
When entering into a PCP you will make an agreement on a MGFV. This is the guaranteed minimum future value amount that you and the contract provider believe that the car will be worth when it comes to the end of your contract. Often also referred to as a balloon payment, it is the payment that you will need to make should you decide to buy the car at the end of the term. Do your research and if you can, get a professional opinion on what these cars are likely to be worth before choosing a final figure. Cars lose value very quickly - depreciation is actually the biggest single cost of car ownership - so it might come as a shock to find you've agreed to pay well over the odds for your new car come the time the contract ends.
A lot depends on the finance rate you agree when you set up the contract. Make sure that the rate you are getting is competitive.
The good thing about PCP is that you can avoid expensive bills if you wish to have maintenance included in the cost of your monthly payment. Of course your payment will increase, but it may well be worth it should your car run into problems or need a costly service.
Check to see if Road Tax is included - it is in many PCP deals for at least 12 months. If not, ask about it - your contract provider might well throw it in as an 'extra' if they think it might cost them the sale!
Ending the Contract Early
If you are in a PCP and want to finish the contract early your contract provider may allow you to sell the vehicle in order to pay off the settlement figure. Finishing a contract early is usually a bad idea, and can have expensive consequences - so make sure you know what your options are.