Paying the full price of a car upfront is going to be difficult for most people. This is why most people opt for various financing plans and pay for their cars in installments over a number of years.
The fastest growing form of car financing in Ireland has been PCP, or personal contract plans, for a number of years. The value of PCP contracts has grown from €15 million in 2012 to over €1.4 Billion in 2017. There are a range of other financing options available such as Bank loans, hire purchase and leasing as well as PCP. PCP has a lot of benefits that make people choose it as a way of financing their new car, but there are some downsides that you might not be aware of too.
If you are considering PCP for your new vehicle, then here is everything you need to know before you finalize your plan:
What is PCP
First things first, PCP is another type of car loan that lets buyers get a car without paying the full price upfront. Just like other loans there’s deposits, interest and monthly payments to keep up with.
Even though PCP looks like other car finance programs offered by banks and other finance companies, a few differences set PCP apart.
PCP is Different
PCP allows the borrower to use the car for a specific time and return it at the end and walk away. It is essentially a long-term rental of the car, but with a guaranteed option to buy it at the end of the contract. You are responsible for upkeep and maintenance of the car, and you agree to drive only a maximum number of miles each year you have the car. You’ll pay a penalty if you drive more than you’ve agreed.
With this plan, you can have the latest car without paying the complete amount upfront. However, if you want to keep the car, then you must pay the remaining final deposit set by the finance company. We’ll explain more of this in a bit.
First Consider the End of the Contract
With other finance plans, people might struggle with the hefty deposit fee needed at the start. PCP usually has a smaller initial deposit, it can be anywhere from 5% to 30%. However at the end of your contract there will be a pre-agreed Guaranteed Minimum Future Value (GMFV) of the car. This is what the dealer thinks the car will be worth at the end of the contract on 2 or 3 years. Once you’ve paid all your installments you can walk away from the car or pay this amount to keep the car. This is most often where people struggle, as the GMFV may be in the tens of thousands of Euros.
At the end of your contract you have three options. The first option is to walk away from the car and contract. You’ve paid all your installments and finished the contract. However now you have no car and still need to come up with a deposit for another loan.
The second option is to pay the GMFV and keep the car. This will often mean another loan from a bank or Credit Union. The car may actually be worth more or less than this price, so do some market research first.
The third option is what the dealership is hoping for. You can use the value left in the car as a deposit for another PCP on another newer car and start the process all over again. This assumes the car is worth more than the GMFV though. If it’s worth less you won’t have any excess value left as deposit.
Car Ownership Matters
When you take out a bank or credit union loan for a car you legally own the car you’ve just bought. Like in Hire Purchase though, with PCP you don’t own the car at any point of the contract. Until you’ve completed your contract and paid the GMFV will you own the car. This might be a benefit to some as it allows you to keep your options open. For example, you can change your car at the end of the contract without completing the final payment, by taking the third option we mentioned above and getting another car. You’ll always have the newest car and only be locked in for two or three years.
Before paying the final amount, you are considered a legal user of the car but not the owner. The finance company will still own the car with a strict contract. However, you are still solely responsible for the upkeep of the car.
Separate Deposit for Another PCP
As mentioned above, you can trade your car as a deposit for a new one at the end of the contract. However, this does not guarantee you don’t need a deposit. If you want to renew your PCP with a new car, you have to pay a separate deposit fee. How much comes out of your own pocket will depend on the value of the car you’re trading in and the car you want to get.
If your current PCP car is worth more than the GMFV you can use this positive equity to fund the next deposit. It can help you pay a little less than you were supposed to, or even nothing at all. On the other hand, if it’s worth less, you’ll have to come up with the whole deposit for your next PCP contract.
Rest assured though, if your car is worth less than the GMFV and you want to walk away, you don’t have to cover this. This is a risk the dealer and manufacturer take on.
PCP Appears on Your Credit History
PCP is a loan, after all. It means it will show up in your credit history. So, first of all, you need to have a clear credit history to get a loan. Then, once you get the loan, it is important to pay the monthly installments on time. Your future loan and mortgage providers will see your PCP loan payment schedule and any missed payments. Your account will show the lender’s name, car model, and outstanding balance. Paying a complete initial deposit is important to keep your credit history strong.
To Sum up
In short, a Personal Contract Plan allows some freedoms to get a new car without paying the full price. It is the most used car finance plan due to its benefits and low monthly installments. In addition, this plan keeps your options open for a new car when the contract is about to end. But it does come with some considerations and isn’t for everyone. Too often people forget or ignore the final payment involved and only see the cheap monthly amounts.
Since PCP is a loan, it shows in your credit history. So, make sure to pay your monthly installments on time to have a good credit score. Otherwise, it can impact your PCP renewal, mortgage, and other loans later.
With everything we’ve mentioned above about PCP, you can easily understand how the plan works and if it is the right option for you.
