Personal Contract Purchase |
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Personal Contract Purchase Car leasing has numerous advantages over buying a car outright, but it also has one major drawback – the car is never yours.
So what if you could combine all the advantages of a regular car leasing deal, but also have the option to own the vehicle outright? Well you can, thanks to a process known as Personal Contract Purchase (PCP).
Personal contract purchase agreements are growing in popularity and are actually a straightforward method of car finance as this guide to personal contract purchase will explain.
What is Personal Contract Purchase? Broadly, personal contract purchase is the same as a personal contract hire agreement – but with one key difference. At the end of the contract, there is an optional balloon payment that the individual can choose to pay in order to take ownership of the vehicle. This amount is determined at the outset and allows the driver to keep the vehicle if they are happy with it. However, it is not essential – on the contrary, as with a personal contract hire deal, you could choose to return the car to the leasing company and walk away – subject to fair wear and tear and mileage.
Monthly payments are based on the deposit amount and the difference between the retail value of the car and the residual value – i.e. the estimated future value of the vehicle after depreciation is taken into account. Therefore, the more the vehicle holds its value, the better your personal contract purchase deal will be as that will reduce your monthly payments.
A mileage limit will apply to all personal contract purchase deals. This is because the leasing company will use the mileage limit to determine the vehicle's depreciation and therefore its residual value. So it's important to be honest with the leasing company about how much travelling you are likely to do – exceeding the mileage limit will lead to financial penalties at the end of the agreement.
Personal contract purchase is seen as a direct alternative to the traditional Hire Purchase (HP) agreement and is subject to the protections set out in the Consumer Credit Act.
What are the pros and cons of Personal Contract Purchase? There are many advantages to personal contract purchase including: *Fixed prices – You know exactly what you have to pay each month, which can help you set and keep a budget. *Initial down-payment – usually only a small deposit is required, typically lower than a HP agreement deposit. *Refinance – If you prefer, you can refinance the balloon payment at the end of the term. *Flexibility – for drivers looking to change vehicle every two to three years, PCP provides an easy way to do so. *Maintenance packages – Most personal contract purchase agreements will include maintenance packages that can range from basic servicing to total vehicle management. *Driving a new car has many benefits. The newer the car the more fuel efficient the engine is and the car will come with the latest safety features. *CO2 emissions are also likely to be lower the more modern the car. No depreciation concerns – It's not necessary to buy the car at the end of the term and so you can still choose to walk away without re-sale concerns. *Access to more 'upmarket' vehicles – One of the key elements of a personal contract purchase deal is that it gives you access to previously unaffordable vehicles due to the low deposit and low monthly payments.
Personal Contract Purchase agreements have several disadvantages, these include ensuring the vehicle is meticulously maintained - if the driver hands the car back at the end of the agreement in a condition worse than acceptable wear and tear, the driver will be liable for all repairs. All PCP deals contain a strict mileage limit, cars with higher than the agreement limit will be charged an additional fee. It's also worth remembering that you will have to arrange comprehensive car insurance as the car will not be yours until the balloon payment is made. The road fund licence does not come built in to PCP agreements.
Who is personal contract purchase right for? Generally, personal contract purchase is seen as the 'best of both worlds' in that you can choose to walk away from a deal, or exercise the option to buy. Overall, personal contract purchase will generally be more expensive than traditional contract hire and hire purchase deals, but monthly payments remain low and affordable.
If you travel fixed distances and have a stable lifestyle, the mileage issue should not be a problem. Consequently, personal contract purchase deals are well-suited to people who want to drive a car that would otherwise be unaffordable, like to regularly change their car, and who want to keep their options open with the right to buy. |
Leasing:
Car and Vehicle leasing is the leasing of the use of a motor vehicle for a fixed or indefinite period of time. It is commonly offered by dealers as an alternative to car or vehicle purchase. The key difference in a lease is that after the lease expires, the lessee must return the car or vehicle to the dealer or buy it.
Rationale:
Car Leasing offers advantages to both buyers and sellers. For the buyer, lease payments will usually be lower than payments on a car loan would be and qualification is usually easier. Some consumers may prefer leasing as it allows them to simply return a car and select a new model when the lease expires, allowing a consumer to drive a new vehicle every few years without the responsibility of selling the old vehicles. A lessee does not have to worry about the future value of the car or vehicle, while a vehicle owner does. For the leasor, leasing generates income from a vehicle the leasor still owns and will be able to sell or lease again once the original lease has expired. As consumers will typically use a leased vehicle for a shorter period of time than one they buy outright, leasing may generate repeat customers more quickly, which may fit into various aspects of a dealer's business model.
Lease agreement:
Lease agreements typically stipulate an early termination fee and limit the number of miles a lessee can drive (for passenger cars, a common number is 10,000 to 15,000 miles per year of the lease). If the mileage allowance is exceeded, fees may apply. Dealers will typically allow a lessee to negotiate a higher mileage allowance, for a higher lease payment. Car Lease agreements usually specify how much wear on the vehicle is allowable, and the lessee may face a fee if that amount of wear has been exceeded.
The actual car lease payments are calculated very similarly to the way loan payments are, but instead of an APR, the company uses something called the money factor.
At the end of a lease term, the leasee must either return the car or vehicle to the owner or purchase it. The end of lease price is usually agreed upon when the lease is signed.
