What Is A Personal Contract Purchase Agreement?

Purchasing a car outright is a thing of the past. Many of us find it easier to purchase a vehicle through a finance option. Personal Contract Purchase (PCP) is the most popular finance option in the UK and for good reason. You pay a deposit, fixed monthly payments that allow you to budget effectively and have three flexible options to choose from when the agreement ends.

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What is Personal Contract Purchase?

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Personal Contract Purchase is a finance agreement that allows you to lease a car for a period of time. These agreements usually split the cost of the car into a deposit and a series of fixed monthly payments with a balloon payment at the end. PCP agreements commonly run for between two to four years with the majority standing at 48 months.

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 At the end of the agreement, you have three options to choose from for what you can do with your car. PCP agreements offer great flexibility which allows you to own the car by making a balloon payment. You can return the car with no additional cost or you can part exchange it in for an upgrade.

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How does a PCP agreement work?

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On a PCP agreement, you pay fixed monthly payments. This means you will have no nasty, surprise increases throughout the agreed period. The monthly payments are decided by different factors. A primary decider is the size of the deposit you put down in the beginning. The larger the deposit you put down, the lower your payments will be. The deposit amount is usually optioned into three.

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  • Initial three-months worth deposit
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  • Initial six-months worth deposit
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  • Initial nine-months worth deposit
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Another deciding factor for the amount you will pay monthly is your annual mileage allowance. At the beginning of your agreement, you will decide how many miles you will drive each year. The average is around 10,000 miles but it can be higher or lower dependent upon your needs. The lower the mileage the less you will pay on monthly basis and vice versa. This is because the more miles you travel the more value drops off the car. In a PCP agreement, you are only paying off the depreciation of the car over the lease period.

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Personal Contract Purchase diagram

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 How does a PCP agreement end?

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A Personal Contract Purchase agreement offers the most flexibility when offering you options at the end of your agreement. PCP agreements have three options for you to choose from as mentioned above.

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  • Purchase the car through the remaining balloon payment (GMFV)
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  • Return the car at no extra cost (except for possible wear and tear charges)
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  • Part exchange and upgrade to a new car
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The first choice is to pay off the balloon payment and become the legal owner of the vehicle. The balloon payment is calculated at the start of the agreement by estimating how much the car will be worth at the end. This is known as the Guaranteed Minimum Future Value (GMFV). This is done through the annual mileage amount