Personal contract purchase (PCP)
PCP is similar to HP, with a fixed interest rate and lending periods usually between 12 and 36 months. Agreements involve a deposit, monthly repayments and a final balloon payment. The size of the balloon, or whats known as the guaranteed future value (GFV) of the car, is based on the length of the loan and anticipated mileage.
At the end of the agreement, you can forego the balloon payment and return the car; pay the balloon using savings or a loan and keep the car; trade in the car and, if the value is greater than the GFV, put the difference towards a new deposit; or pay off the balloon and sell the car privately, keeping any equity.
Choose PCP if
• You want low monthly repayments. These cover depreciation and interest, while the cost of the asset (the car itself) is deferred to the end of the agreement, payable in a lump sum.
• You want flexibility. Having plenty of options means you can adapt to any future changes in your financial circumstances.
Watch out for
Negative equity Its rare for a cars value at the end of an agreement to be higher than its guaranteed future value, and sometimes it can be lower. The shorter the lease, the more likely the value will be correct.
Miscalculating your mileage Go over the agreed figure and youll have to pay an excess fee. Likewise, if you agree a mileage of 10,000 and do just 5000, youll be paying a bigger balloon amount than you need to.