Auto Consulting: Confused About Personal Contract Plans (PCPs)? Our car expert answers your questions

What is a Personal Contract Plan or PCP?

CPs are a form of car financing based on a hire-purchase (HP) agreement. Unlike a regular HP or bank loan, repayments are typically lower because you’re paying off the car’s depreciation and not its entire value. The non-refundable deposit is typically 10 to 30 percent of the car’s value and can be paid in cash. If you already own a car, you can exchange it for part or all of the deposit, depending on the value.

What is the guaranteed minimum future value (GMFV)?

The guaranteed future minimum value (GMFV) indicates what the car will be worth at the end of the contract period.

What options do I have at the end of a PCP contract?

At the end of your PCP contract you have three options. First, you can return the car on the agreed terms at no extra cost, but if your car doesn’t meet the terms, you face fines. Second, you can start a new PCP deal and use all of the existing car’s equity. For example, if the GMFV is €9,400 but the car is actually worth €10,600, you have €1,200 of equity that you can use to make another PCP deposit. Third, you can pay off the GMFV, a lump sum payment, at the end of your contract to purchase the car.

What are the benefits of a PCP plan?

With a PCP, the monthly repayments are much lower than with a standard loan because you’re not paying off the full value of the car; Rather, the repayments are calculated by subtracting the deposit and GMFV from the sale price, so that amount plus interest determines what you pay.

What are the risks?

If you intend to own the car at the end of the contract, PCP is generally not ideal as you will have to pay a large final payment (GMFV) at the end of the contract. You’d be better off with a bank or credit union loan and spread the repayments over a few years instead. Under PCP, the finance provider can and will take the car from you if you miss repayments. Or if you cancel your contract and return the car, you’ll likely have to pay a hefty fee. It is your responsibility to maintain the car regularly and to keep the agreed annual mileage.

top tip: Always compare loans and financing using the Annual Percentage Rate (APR) as this is essentially the true cost of borrowing as it includes interest and fees. The lower the APR, the better the financing.

Email sundaymotors@independent.ie

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Fry Electronics Team

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