What are the disadvantages of a Personal Contract Purchase?
When you are sitting in a shiny new car showroom, the sales executive will obviously charm you with all the ways that a PCP will improve your life (because they want your money), but they don’t usually dwell on the negative aspects of why a PCP may not be the best solution for your needs. And those negative factors can be pretty significant, especially if things don’t work out so well or your circumstances change over the next three or four years.
The real reason that car dealers and car manufacturers push PCP finance so hard is that it’s generally good news for them, rather than being good news for you. It may or may not be suitable for you, but they don’t really care about that. They’re just desperate to make you think that it’s good for you.
So here are the things you really need to consider before signing that PCP contract:
- You get locked into an endless PCP cycle
- It’s really difficult to get out early
- The terms and conditions are restrictive
- You can’t sell the car to repay your debt
You get locked into an endless PCP cycle
A personal contract purchase is not great if you want to keep your car at the end of the agreement, as you will have to pay a large chunk of money to settle the rest of the finance (the balloon amount).
Statistically, there’s about a 90% chance you won’t have enough cash available to pay off your balloon/GFV amount at the end of your agreement to keep your car, so you’d have to borrow more money to pay off the balloon. Yet you have already paid interest on the balloon amount, so you are paying more interest on that money all over again.
If you don’t have the cash to pay off your balloon at the end of your agreement, and you don’t want to borrow more money to keep your car, that means you are pretty much locked into having to change your car at the end of the term and take out another PCP, even if that’s not especially convenient for you at the time.
It’s really difficult to get out early
A PCP is not great if you want or need to change your car early (see below), as your monthly repayments are not enough to cover the car’s early rate of depreciation – especially for new cars – as well as all the interest on the loan.
The terms and conditions are restrictive
If you want to claim the Guaranteed Future Value and return the car, you must have complied with the mileage allowance. The car must also have been fully serviced – on time, every time – by a franchised dealership (not an independent garage). Finally, you must return the car in good condition, as any damage beyond normal wear and tear will be charged to you and it will not be at mates’ rates!
Because the car belongs to the finance company, you can’t change the registration details (for example, transfer the car from your name into your spouse’s name) and the person borrowing the money must be the registered keeper and main driver.
The car must be kept fully comprehensively insured at all times, with the finance disclosed to the insurer, and the insurance must also in your name as the registered keeper, so you can’t have the car registered in someone else’s name or at a different address.
You can’t sell the car to repay your debt
A personal contract purchase is a form of secured finance, meaning the money borrowed is secured against the vehicle, which belongs to the finance company at all times until the final balloon is paid out (unlike a personal loan, which is unsecured).
If you want to sell the car yourself, rather than part-exchanging it or giving it back to the finance company, it can be tricky because it’s not actually your car to sell. Some finance companies will have specific requirements about how you go about selling their vehicle and settling your debt, while others will simply refuse to allow it at all.
Can I settle my PCP early?
Yes you can, but the important thing you need to remember is that the finance company does not guarantee the value of the car against your settlement until the conclusion of the agreement.
For example, if you want or need to sell your car two years into a four-year agreement, you will have to pay any difference between what your car is worth and what you still owe (called negative equity). So if your car is currently worth £15,000 but your finance settlement figure is £18,000, then you will have to pay the extra £3,000 to clear your negative equity.
There is usually a charge to settle a personal contract purchase early, but it is not normally large. Some finance companies also allow you to pay in additional lump sums during the term, to either reduce your monthly payments or bring the end-date forward. Some allow it with no charge, some will charge you for it and some don’t allow it at all. Make sure you check before you sign up.
Is a PCP right for me?
You need to make sure you properly understand any finance agreement before you sign up for it. Be aware of exactly how much you are paying in interest and fees, and make sure you are not over-stretching yourself.
If that means that you can’t afford the car of your dreams, then so be it. There will always be additional expenses when running a car, and if you can’t afford to eat because your monthly car payment is due then you have made a fairly fundamental error.
Broadly speaking, if you are likely to change your car in a few years’ time, then a PCP can be a cost-effective way to finance it. If you are going to keep it for longer than that, then you may well be better off with an HP and pay the car off in larger equal instalments instead of a few years of lower payments then a big hit at the end.
A PCP works best if it runs its full course. If you are expecting your circumstances to remain pretty stable over the next few years and you have no real concerns about making your monthly payments for the entire duration of the agreement, a PCP may well be suitable.
However, if your life circumstances change (job, family, marriage, divorce, relocation, etc.) and you need to get out of your agreement, a PCP can be a very expensive problem to have to deal with.
As a rule, the cheaper a deal sounds, the more likely there are to be big expenses if things don’t work out. It’s a bit like buying an airline ticket – you usually have a choice of a super saver cheap ticket and a full-fare ‘flexi’ ticket. If you buy the cheap ticket you’ll save some money, but if you have to cancel or reschedule then you will lose it all. If you buy the more expensive ticket, it’s the same seat on the same plane but you can cancel or change your plans without losing all your money.
Read the finance documents carefully and make sure you are comfortable with the numbers offered. Ask as many questions you like before you agree to anything, to make sure you understand the full implications of the agreement. It is better to feel silly before you sign up than feel very stupid afterwards!
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Some of the names manufacturers use for their PCP plans
Car companies love branding their products to make them sound sexier. In reality, it tends to just make things more confusing for customers. Here are some of the names that are used for personal contract purchase agreements – but they are all the same thing.
Alfa Romeo Preferenza, Audi Solutions, BMW Select, Citroën Elect, Fiat I-Deal, Ford Options, Honda Aspirations, Jaguar Privilege, Jeep Horizon, Kia Access, Land Rover Freedom, Lexus Connect, Mercedes-Benz Agility, Mini Select, Mitsubishi Alternatives, Renault Selections, SEAT Solutions, Škoda Solutions, smart Agility, Suzuki Driveplan, Toyota AccessToyota, Vauxhall Flexible PCP, Volkswagen Solutions, Volvo Advantage.
Most car finance agreements in the UK are regulated by the Financial Conduct Authority, and anyone involved in the selling of car finance must be accredited by the FCA.
You should always consider the terms and conditions of any agreement carefully before taking out any form of car finance, as you are making a substantial ongoing commitment and there may be significant costs if you change your mind or are unable to meet your commitments at a later date.
This article was first published in 2013 and is continually updated based on reader feedback and questions. Latest update: February 2020.