Taking out a personal contract purchase (PCP) deal is similar to a hire purchase agreement: you’ll often be asked to pay an initial deposit and then monthly payments for a set period. The higher your deposit, generally, the lower the monthly payments. Even without the deposit though, monthly payments are typically lower than you’d find with a hire purchase deal or an unsecured loan. This is because your instalments pay off the difference between the initial value of the car and the predicted value at the end of the agreement. However, as you’re only paying off the depreciation, you won’t own the vehicle at the end of the term.
At the end of the agreement, if you decide you want to keep the car, you’ll need to pay what’s known as a “balloon” payment. This will cover the cost of the vehicle, and it’s this payment that transfers ownership from the finance company to you. If you don’t want to keep the vehicle, you can hand it back, or start a new PCP deal and get a new car. The value of the car will sometimes be more than the finance company predicted, and if this is the case you can put this difference towards starting a new PCP deal.
As the value of the vehicle at the end is important, so is the condition of the car and its mileage. When you take out a PCP deal you’ll need to specify your annual mileage. If you go over this you could end up paying additional charges – up to 10p for every mile over your set limit. But this will be confirmed when you take out your deal.