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What is a PCP agreement?

 

We believe that this form of vehicle purchase process may in fact be amongst the most popular forms of purchasing a vehicle in the UK today. However, why do a lot people still not understand what it is or what it does?

 

A PCP (Personal contract purchase) is a form of finance you take out on a new vehicle. It has been described as being the most flexible form of finance available in the UK motor industry. You choose the amount of deposit you wish to place on the vehicle, how long you wish to finance the vehicle for and the mileage you intend to do. This will then result in a fixed motoring cost to pay on a monthly basis.

 

At the end of the agreement you will have the option to buy the vehicle or hand it back to the lender (I.e the motor dealer). The majority of dealerships will then offer you a new agreement on a brand new model. The attraction of a PCP agreement is that you pay the monthly fee for the amount of time you wish to before either taking out the option to buy or exchanging it for another PCP agreement on a brand new car.

 

Why do the monthly costs tend to be lower than other agreements?

 

The answer is simple. The car which you choose to take the agreement on will have a Guaranteed Future Value or a GFV in dealer speak, this future value is a pessimistic value of which the lender believes the car to be worth at the end of the agreement. The GFV will be the balloon payment at the end of the agreement. This final balloon payment on the model will be the amount the lender expects the vehicle to be worth.

 

The GFV plus the amount of deposit you place on the vehicle will determine the cost of your monthly payments. If you place a higher deposit on the vehicle then of course your monthly payments will decrease. Essentially the figure of which you are financing is the depreciation of the new car.

 

Depreciation is simply the level at which the new vehicle will lose value. As a rough rule of thumb, motor industry experts expect the average vehicle to depreciate by as much as half within the first three years of ownership.

 

If you have taken out a PCP agreement on a vehicle priced at £20,000 over a three year period and placed a deposit of £3,000 on the model and the GFV was £9,000. The amount you are financing on the vehicle would be the £8,000 that would be lost due to depreciation.

 

If you wish to find out what your Gap Insurance options if you have purchased a vehicle through the form of a PCP agreement.

 

                    What is a PCP agreement?