What is PCP?
PCP was designed specifically to be a personal contract for private individuals. Should you enter into a PCP plan, it is classed as a conditional sale agreement that offers you protection under the Consumer Credit Act 1974 and the Financial Services Regulations 2004.Seen as a way to avoid the depreciation trap, a PCP agreement allows you the option to set up a contract term, with monthly payments. At the end of the term, you then have the option to purchase the vehicle, or simply hand it back to the contract provider.

Breaking it down
How is the monthly price determined?

There are a number of factors involved when considering the monthly contract price. In order to work out the Personal Contract Purchase payments, the provider will need to take into account:

1. How much the vehicle is costing new
2. How much deposit you are placing on the contract*
3. How long the contract will be over
4. How many miles you are intending to do
5. A GFMV – or residual value
6. The finance rate
7. Maintenance Requirements.
*deposit up to a maximum of 40% of total value.

So when that has all been covered with the dealer, the vehicle is supplied for a set period, usually between 24-42 months, at a fixed rental, decided on using all the above factors.
Minimum Guaranteed Future Value You will also agree on a MGFV (or GFV) which is a minimum guaranteed future value figure - sometimes called a balloon payment. This is usually a large sum, which is worked out using similar factors to that of the monthly payment.

When your agreed contract term comes to a close, you have 3 options:

• Pay the GFV and take the car away - it's yours.
• Hand it back and walk away - but you won't get any of your deposit or repayments back.
• Use the difference between the GFV and the actual real value of the car as deposit towards   your next car.

The Benefits
So what are the initial benefits of PCP?

You know exactly where you are financially, with fixed monthly payments that are usually lower than other forms of finance. Road Tax is included for the first year in all cases and then for the life of the contract if maintenance is included.

Buying an older car may seem like a safer option – after all, it will be cheaper to buy. However, one large bill can completely wipe out any saving you made on buying the older vehicle. If you go for a PCP with maintenance included, you won’t have any service or repair bills to pay for – it’s all included in the cost of your monthly payment. There’s no negative equity and can be less risk of depreciation:

Depreciation
Depreciation is the biggest single cost of new car ownership, so getting the best deal offsets the cost of buying the next new one. The difference between what you paid for the car new and what you get when you sell is the amount of money you have lost in depreciation.

The aim of many people is to reduce this gap as much as possible - PCP does this by guaranteeing a GFV, and therefore to fall into negative equity is not possible as the future value is guaranteed at the time of purchase.
 

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