Top 5 PCP Car Finance Myths Debunked
Over time car finance has become a very popular way for people in the UK to fund their car purchases. There are different car finance options that we’ve discussed on our blog, however; today we’ll deep dive into debunking some myths surrounding one of these options, Personal Contract Purchase (also known as PCP).
- You Don’t Own the Vehicle
Many people mistakenly believe that owning a car through Personal Contract Purchase is impossible. However, this is only true when under the agreement since it functions as a secured loan. This means that the dealership retains ownership of the vehicle throughout the agreement and has the right to repossess it if you fail to adhere to the terms. At the agreement’s conclusion, if you don’t want to keep the car, you can simply return it to the lender. However, if you wish to keep the vehicle, you have the option to make the final balloon payment. Remember though that usually a balloon payment is higher than your monthly repayments.
- Miles Don’t Matter
At the start of your PCP agreement, you must agree on a mileage limit. This is crucial as we will need to estimate the Guaranteed Future Value of your chosen vehicle. Many drivers mistakenly believe that mileage doesn’t matter and that setting a lower mileage will play in their favour. This is, however, not accurate and could result in additional costs. In fact, when your PCP agreement ends, if your car exceeds the mileage you originally set, you will need to pay extra fees to compensate for the excess. If you choose to keep the car and pay your balloon or final payment, then mileage won’t matter as the vehicle will be yours to keep. However, if you plan to return the car at the end of your agreement, you will see that mileage does indeed matter.
- You Can Hand Your Car Back Anytime
There seems to be a misconception among some people that if their circumstances change and they can no longer afford their payments, they can simply return the car to the dealership or lender and walk away at any time. This is not correct. In fact, in all PCP agreements, there will be a Voluntary Termination clause, which allows you to return the car and terminate the contract, but there are certain conditions to bear in mind. You can only exercise this option if you have paid at least 50% of the total amount you owe. This doesn’t mean, however, that this 50% threshold is based on the duration of the agreement, as it isn’t. To give you an example, if you have a four-year PCP agreement and have completed two years of repayments, you will still be far off from reaching the 50% repayment mark because the balloon payment has not been significantly reduced. Typically, you only reach the 50% repayment point in the final months of a PCP, though the exact timing varies depending on various factors. It's still possible to voluntarily terminate the agreement before reaching this 50% point, but you will be required to pay the remaining balance necessary to achieve the 50% mark.
- You’ll Get Your Deposit Back
Many people mistakenly believe that you will get your “deposit” back at the end of your PCP agreement. The terminology used for this initial payment, often referred to as a "deposit," can be misleading in the context of Personal Contract Purchase as in reality the money you submit at the beginning of the agreement functions as the first payment, and, therefore, it should not be expected to be refunded once the agreement concludes.
- PCP is the Most Flexible Car Finance Option
Personal Contract Purchase offers significant flexibility, allowing you to choose which terms suit you best, choose between new and used cars, and have a range of options at the end of your agreement. However, it’s important not to dismiss other finance options entirely. This is because in some situations, such as, if you prefer to spread your chosen car’s cost in equal installments, other finance options like Hire Purchase would be more suitable, where once your final installment is paid, you will effectively be the owner of your car.
We hope this article has helped you understand the myths surrounding PCP and the truth behind them. However, should you have any further questions, please don’t hesitate to contact us and we’ll be more than happy to help.
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