Buying a car can be complicated enough without all the car finance that comes with it. Inspecting the car chassis and locating the sills (yeah, us neither) can be enough to send your head spinning. And that’s before you even hear a mention of the Guaranteed Minimum Future Value.
Yes this is a term you’ll have to come to grips with if you opt for PCP finance to buy your new car. Don’t get us wrong, we know PCP finance is very convenient. But we also know it’s incredibly inflexible. And that the low monthly repayments can distract you from a raft of fine print that might otherwise send you running.
Read on for a simple, no-frills explanation of PCP finance. And an explanation of how PCPs differ from a traditional car loan.
What is PCP Finance?
First off, PCP simply stands for Personal Contract Plan. And ultimately, that’s where the simplicity ends.
A PCP is one of the least flexible forms of finance. Essentially PCP finance is a lease scheme. It makes financing a new car seem affordable - due to low monthly repayments. In effect, with a PCP you hire the car for a period of time, usually between three and five years. And you make the repayments over this time. At the end of the PCP agreement, you’ll have to make the balloon payment in order to actually own the car. This payment is also known as the guaranteed minimum future value (GMFV).
With a PCP, you also need to be conscious of your mileage. This is because the balloon payment, or GMFV, will have been calculated with your annual mileage in mind. Crucially, with a PCP you are also restricted with what you do while you are still ‘hiring’ the car. If your financial circumstances change and you find you can no longer afford the monthly repayments, well, too bad. You can’t sell the car to pay your debt, as it’s not yours to sell.
If you still want to go ahead with PCP finance, then consider the below before you sign the dotted line.
- You may be charged a rescheduling fee to extend the term of the PCP
- You need to take note of the cap on the number of miles/kilometres you are allowed to clock up over the period of the PCP
- You may be requested to commit to certain car servicing agreements
- Ensure you always enquire about additional fees and charges. You are entitled to a list of all additional charges - so ask the garage for this before you sign