The key features of PCP may appear complex at first, yet consumers have discovered why its flexibility has enabled it to become so prominent within the industry.
So, how does it work?
Much like other means of finance, consumers must put down a deposit to begin the process of financing their chosen car. While the initial payment can vary, depending on any given dealer, it’s likely that a five to ten percent deposit will be paid upfront, with a term of the deal put in place - which was originally two years to guarantee customer equity. Today, it’s more likely to be three or four years (which will create a negative equity position if the customer attempts to come out of the contract early). In some cases, this can be many thousands.
If the price of the car is valued at £10,000 and a £1,000 deposit has been made, then there’s £9,000 left to pay on the car. That doesn’t mean, however, that during the term of the deal, the consumer will have to pay off the remaining £9,000.
Instead, the finance company will forecast how much the car is set to decrease in value throughout the duration of the term. This is based on the length of the term and the total mileage the consumer is expecting to rack up.
In this case, if it has been agreed that the car will be worth £5,000 after a two-year term, the consumer will repay just £4,000, plus interest, on top of the £1,000 deposit.
The consumer will pay in fixed monthly payments, which will also include the Annual Percentage Rate (APR) on the full price of the car throughout the term. The average APR for a consumer with good credit is around 6% flat annual rate or 11.9% but this can vary, depending on any of the following:
The immediate benefits for consumers who take on a PCP are quite clear: without having to pay off the full price of the car over the term, the monthly payments are much less than those who have gone down a different finance route.
Consumers are by no means stuck into the agreement too; once the total amount of payments made exceed the outstanding payments - plus the final (MGFV or Balloon) of the vehicle - there are options to end the deal early via a voluntary termination.
There are various reasons as to why the consumer may want to end the deal early, with one of the most obvious being that they’re looking to get a new car and may find a superior deal.
But what happens if a consumer does reach the end of the term?
This is where a decision will have to be made, and there are viable options to take:
For lower monthly payments, the opportunity to end the agreement early and the flexibility to either purchase the car outright, or at the very least know their position and car value at the end of the term, a PCP has a range of advantages for customers. It’s also ideal for those who are looking for the ‘new car’ experience on a regular basis.