Financing your new vehicle is an important decision, how much do you know about the different ways to finance your new purchase?
Below we talk you through the advantages and disadvantages of purchasing your new car on either personal contract hire (PCH) or personal contract purchase (PCP)
Personal Contract Purchase Agreement
This agreement is very similar to a standard hire purchase agreement, it consists of a deposit at the start of the agreement, followed by monthly payments during ownership of the vehicle, at the end of the agreement there is a final balloon payment more commonly known as the Guaranteed Future Value (GFV).
How does a PCP Agreement work?
At the start of the agreement the GFV is set, this is how much the vehicle will be worth by the end of the agreement, this is set by the finance company that is been used to fund your new vehicle.
This means that your monthly payments consist of how much your new vehicle is going to depreciate over the term of your agreement plus any interest.
Remember, as part of this agreement you are liable to the full amount of finance if anything was to happen to the vehicle.
Once your PCP agreement finishes you will have three options:
- Pay off the Guaranteed Future Value and own the vehicle outright
- Part exchange the vehicle for a new car
- Hand the vehicle back to the finance company, the finance company has already predicted the GFV, this will settle off any outstanding finance
Pros:
- Finance payments are going to be lower than if you funded your vehicle on a standard Hire Purchase
- If you don't want to own the vehicle, you can walk away after you’ve made all your payments
- You can drive away in a new or used vehicle every couple of years without having to worry about selling your current vehicle on
- If the vehicle is worth more than the GFV at the end of the term, you can use this equity as a deposit for your next vehicle
Thing To Think About:
- There is a mileage stipulation that is set at the start of the agreement, if you go over this mileage there will be a charge
- If you want to own the vehicle at the end of the agreement, you must pay off the GFV in full
- You can't sell the vehicle until the finance has been settled off
- You won't be the legal owner of your vehicle until all the finance has been paid
- You will need to keep the car correctly insured, maintained and in your own possession until all the payments have been made.
- There may be a penalty if the vehicle is returned with any damage, excluding any fair wear and tear.
Personal Contract Hire Agreements
The latest way to fund new vehicles personally, you will make the payments set out in the contract with the funder, at the end of the agreement the vehicle is then handed back to the finance company without the option to own the vehicle.
Personal contract hire agreements consist of an initial payment and then monthly payments based on the depreciation of the new vehicle.
As most lease companies can purchase these vehicles at a lower price made available to a normal customer it means they are able to pass these savings on in the form of lower payments.
Benefits:
- Allows you to hire both new and used cars
- Includes road tax for the term of your agreement
- You can add maintenance packages to your agreement which will give you worry free motoring during your time with your new car
- Its hassle free, you won’t need to worry about selling your vehicle at the end
- You will benefit from lower monthly payments
Hidden Costs:
There can be costs to handing your vehicle back to the finance company which many customers don’t expect. This applies to both PCH and PCP. These costs are for any damage excluding standard wear and tear and any missed routine servicing.
There are also costs involved if you go over the stipulated mileage that you set at the start of your agreement for both PCP and PCH agreements, these can vary from 3p to around 15p per mile so not excessive.
When considering PCH make sure the payment you are looking at includes VAT, leasing is predominantly done by businesses who want the payments to exclude VAT, so make sure you ask the question.
Which Way Is Better?
Ultimately financing a vehicle must be one that suits your needs, PCH gives you the chance to change your vehicle without the hassle of having to sell or part exchange it and normally gives you a lower payment. PCP gives you the chance to buy your vehicle outright if you don't want to continue to pay-out monthly payments on a regular basis.