Personal Contract Purchase (PCP) is similar to a Hire Purchase agreement as you will usually pay an initial deposit, followed by monthly instalments.
What makes PCP different is that your monthly instalments are paying off the depreciation of the car, and not its entire value, over the course of the term. Then, when you get to the end of your agreement, there is a final, balloon payment that must be made if you want to keep the car.
At the start of your PCP contract, a Guaranteed Future Value (GFV) of the car is set. This is the car's expected value when your contract ends.
For you, this means that the money you’re repaying is the difference between what the car is worth now and what it will be worth at the end of your contract (the depreciation) plus interest, which is calculated on the full value of the vehicle. You'll pay this difference off in monthly instalments.
Remember: you are still liable for the full amount of the vehicle if anything happens to the car or if you settle early.
This means lower monthly payments for you, but you will need to pay a final payment at the end (the Guaranteed Future Value) if you want to keep the car.
Once your agreement is finished, you’ll have three options:
Buy the car by paying the final balloon payment (the Guaranteed Future Value).
Hand the car back - your finance company has already predicted the Guaranteed Future Value of the car, so handing the car back will settle the deal.
Part exchange for a new car.
Monthly payments on a car financed by PCP are usually lower than if your car is financed by a Hire Purchase agreement.
If you decide not to buy the car, you can simply walk away when you've made all the payments.
Similar to PCH, you can drive away a new or used car every few years (dependent on the chosen term) without worrying about selling it on.
If your car is worth more than the Guaranteed Future Value then you can use that equity towards a deposit on a new car.