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How Personal Contract Plans (PCPs) work

There was a time when we’d buy our cars on hire purchase or with a loan, over a series of years, and once it was paid for we would probably start the process all over again. But nowadays, thanks to the rise of the Personal Contract Plan (PCP), we don’t even wait until we’ve paid for our car – we just hand it back after three years (or even less) and get a new one.

It’s an attractive proposition for many. For a fixed monthly fee we can have a car that’s always covered by a warranty, never needs an MoT and might have all of the servicing taken care of too. What’s not to like? The simple answer is – more than you might expect. It’s like perpetually renting a home rather than buying one. You could view it as dead money or as a way of enjoying hassle-free car ownership. It’s not the cheapest option but only you can decide if it’s worth the cost.

How a PCP works

It’s a straightforward concept. You pay an initial deposit then a set monthly fee and you have a new car at your disposal. But you don’t own it; just think of it more as a long-term rental. Effectively what you’re doing is financing the depreciation on your new car which is why after a typical period of three years you’ll have paid out many thousands of pounds yet you still won’t own it.

When you sign up to a PCP the dealer will set a Guaranteed Minimum Future Value (GMFV) for the car, which is the minimum amount it’ll be worth at the end of the contract. If the car plummets in value unexpectedly you’ll be protected and if the car is worth more, you have extra equity that you can use as a deposit if you decide to sign up to another PCP.

When the PCP term is up you have three options. The first is to hand it back and walk away; you can sign up for another PCP elsewhere, buy a used car outright or start taking the bus. The second option is to buy the car outright by stumping up what’s called a balloon payment. It’s effectively whatever the car is worth and if it’s a mainstream family car it’ll be a few thousand pounds.

This second option is appealing for many as it means you can take on the car that you’ve been running since it was delivered to you as a brand new motor. If the car has been nothing but trouble you’ll be glad to see the back of it, but if it’s been fabulous and it won’t take much to secure it, you can keep it forever subject to having the necessary readies. You’ll know its history and paying this final settlement figure means you don’t have to sign up to another PCP, committing yourself to fixed outgoings for several more years.

However, the third option is also the most popular even though it’s the most expensive. It involves signing up to a fresh PCP and it’s easy to see the appeal. It means there’s always a new car on your drive that’s in warranty, has all of the latest features and should prove to be reliable as it’ll have covered few miles.

So far so good, but there’s a complication. Manufacturers are churning out new cars faster than the market can absorb them, so along with pre-registering they’ve latched onto a neat way of finding homes for a few more – via PCPs.

Once you’ve signed up for a PCP that runs for three years, the chances are that the supplying dealer will contact you half-way through to ask if you’d like another spanking new car. It won’t cost you any more so of course you say yes, signing up to another three-year contract for the privilege.

The dealer then takes away your 18-month old motor to sell it on their forecourt. It’ll be in excellent condition and will have covered few miles because if this isn’t the case you’ll have breached your contract with them – they just can’t lose. Meanwhile, you’ll be committed to another three years of payments so you have to consider very carefully whether or not you really do need to update your car quite so often.

What’s not to love?

Depreciation is the biggest cost of running a car and with a PCP you’re just funding a car’s constant loss in value. So while having a perpetually new car on the drive might seem appealing you’re paying for the privilege.

For example, if you take out a PCP on a city car you’ll be doing well to pay less than £150 per month for anything, or £1800 per year. That’s £5400 over three years – a sum of money that secures outright a very tidy recent used supermini.

Move up to a small family hatch such as a Ford Focus, Vauxhall Astra or Volkswagen Golf you’ll pay £250 per month on a PCP, or £3000 per year. Over three years that becomes £9000 – which is enough to buy a very decent used car, which admittedly may be out of warranty and might cost a bit more to run. but it’ll be significantly cheaper – and you’ll own it.

Don’t underestimate the importance of this latter point. As long as your car is on a PCP there are restrictions attached. For example you can’t modify the car at all, must hand it back undamaged and (most crucially for many) there are mileage limits too, typically set at 6000-10,000 per year. It’s not unknown for some people to leave their new car on the drive and catch the train or cadge a lift with friends, because they can’t risk going over the mileage limit. Do so and you’ll have to pay an excess mileage charge.

Yes – or no?

As the saying goes, you pay your money and you take your choice. PCPs offer peace of mind but at a price. If you’re happy committing to fixed outgoings for three years or more and you can afford it a PCP can be a great option. But if money is tight and might get even tighter, think very carefully before you sign.

Richard Dredge

June 2016