Breaking down the PCP
As with an HP, a buyer will put down a deposit on their new car and finance the balance. With a PCP, there is a maximum deposit that is allowed (which varies from finance company to finance company), but usually it’s about 30% of the total price of the car. Your deposit can be cash or your current car as part-exchange (trade-in), or a combination of both.
Most PCP deals are available for anywhere between 18 and 48 months, although the most common is 36 months. As a general rule, longer terms give lower monthly payments, although it’s not necessarily a dramatic difference because longer terms have lower final balloon payments (which we address below).
Guaranteed Future Value (the balloon)
The Guaranteed (Minimum) Future Value (GFV or GMFV) is the key to how a PCP works. As mentioned earlier, over the term of your agreement, you are only paying back a portion of the borrowing. When you apply for a PCP, the finance company calculates a predicted minimum value for your car at the end of the agreement, and your deposit and monthly payments are paying off the difference between the initial buying price and this predicted value. This final value then needs to be paid to settle the finance agreement, either by returning the car or paying out the remaining amount.
The finance company guarantees that, subject to certain conditions, that the value of your car at this time will be at least the same as the amount outstanding (hence, a Guaranteed Future Value). So, if you want, you can simply give the car back to the finance company and the finance is settled. If the market value of the car is less than the amount outstanding, that’s not your problem – the finance company takes the loss.
How is the Guaranteed Future Value calculated?
When you start the finance agreement, the finance company needs to know what the minimum value of the car is likely to be at the end of the agreement. They predict this by taking into account the car you are buying (and some options or features may slightly improve the final value of the car), the length of the agreement (a car will be worth less after 4 years than after 3, for example), and your annual mileage (a car with 60,000 miles on the clock will be worth less than a car with 20,000 miles on it, for example).
The finance company will set this future value quite low, as it is their loss if the value drops below what you owe on the car at the end of the agreement. The idea is that the car should be worth a bit more than what is owed at the end of the agreement.
What are my options at the end of the PCP term?
So you have reached the end of your PCP agreement and the finance company has written to you to remind you that you will have to settle the outstanding balance fairly soon. What are your choices? We have a new article that explains these in a lot more detail, but this is the summary:
1) Give the car back. The finance company has guaranteed that the value of the car will be equal to the balance outstanding, so you can simply just give it back and walk away. This is subject to a few conditions, namely; the car must not have exceeded its agreed mileage, it must have been serviced on time (and usually by the manufacturer), and there must be no repairs required beyond normal fair wear and tear. If your car does not meet the conditions, there will be financial penalties. Effectively, you have treated you PCP like a lease.
2) Pay the outstanding balance, either in cash or by re-financing. You keep your current car and either own it outright or continue to pay off the remaining balance until it is all yours. Most finance companies will no longer allow you to re-finance the balloon and keep paying it off, which means you are likely to have to borrow the money from elsewhere (such as a personal loan from a bank).
3) Part-exchange your car with a dealer. It doesn’t have to be the same manufacturer or dealer where you bought the car. Any extra (called equity) is yours to keep. Legally, you are not allowed to sell the car privately as it’s not yours to sell. Check with your finance company before selling the car privately, as they may have certain requirements about how they are paid as part of the sale.
Legally, you are not allowed to sell the car privately as it’s not yours to sell. Check with your finance company is you want to sell the car privately, as they may allow it if you comply with certain requirements about how they are paid as part of the sale.
If you sell your car to a dealer, the dealer will settle your finance agreement as part of the part-exchange process. If your car is worth more than the GFV, then any of that equity is yours to use as deposit towards your next car. Say you are offered £12,000 for your car, but your GFV is £10,000. The dealer will pay £10,000 to settle your finance and the remaining £2,000 is yours to put towards your new car. This is the most common way to settle your PCP, and it is why dealers and manufacturers love it.