05 June 2006

PCP (Personal Contract Purchase) - PCP schemes are popular because they are flexible and can offer relatively low monthly payments.

At the beginning, the car's likely value by the end of the agreement is calculated and this is known as the Minimum Guaranteed Future Value (MGFV). You only actually borrow the difference between the car's price now and this figure, and you repay the loan with an initial deposit followed by monthly payments.

At the end of the PCP you have three choices. First, you can hand the keys back and owe nothing, or second, you can pay the MGFV and own the car. However, as the MGFV is always set deliberately low, the car should be worth more than this at the end of the agreement, so the third choice is to put this slice of equity down as a deposit on a new car.

The main drawback is that a PCP can work out more expensive than HP over the lifetime of the loan. (See also Balloon payment.)


Want to know the difference between your APRs and your PCPs? Our Glossary will guide you through the minefield of car-buying terms.

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