Every year, millions of you look to upgrade your car. There are many different ways to get a car these days, but one of the most popular choices is to get a car on PCP car finance.
This is mainly down to the choices you get at the end of the agreement that give you flexibility with whether you want to keep the car or not. It is the most popular car finance option on the market for anyone looking for a new or used car, but surprisingly 88% of men and 75% of women surveyed cannot explain what a PCP deal is.
What is PCP car finance?
In basic terms, a PCP car finance agreement is a loan to help you buy a car you cannot afford to buy outright. It is different to a normal loan however, because it does not pay off the full value of the car. This is one of the reasons it is so popular because it offers you the chance to either pay off the rest of the car and keep it or to simply hand it back.
It begins with a deposit. Most dealers who offer you PCP car finance typically want a deposit. The majority of dealers will expect a deposit of 10% of the value of the car. Other dealers offer valuable contributions of £500-2000 or even more if you are buying a new car. The truth is the more deposit you put down the less you should borrow and the less you should pay on monthly payments so it is wise to put down a good deposit. Another benefit with regards to PCP car finance is that the deposit demands are usually lower than other types of car finance.
The amount you borrow for the car is based entirely on how the lender predicts the car will depreciate by. The more the car depreciates by, the more money you will have to borrow to cover the cost of that. The longer the deal, the more you will likely have to borrow and most deals last between 24-48 months. However, remember that you are not borrowing the full value of the car.
At the end of the agreement, you discover why this form of car finance is so popular. You get three options. You can pay off what is known as a balloon payment. The balloon payment is based on the Guaranteed Minimum Future Value. This is how much your dealer expects the car to be worth at the end of the agreement. It is worked out and set at the beginning of the deal. You don’t have to pay if for some reason you cannot afford too or you didn’t enjoy the car. There are other options.
How does PCP car finance work?
Okay, so you have chosen a car with a ticket price worth £20,000. You choose to put down a deposit of £3,000 and the financial lender calculates that the car will be worth at least £10,000 after the 36 month deal. You will have two options to choose from and they look like this:
If you wish to simply “borrow” the car and not pay the balloon payment at the end, your deal will look like this.
• Deposit: £3,000
• Loan: £7,000 (£10,000-£3,000) plus interest
• Total: £10,000 plus interest
Now if you wish to own the car you have to pay the balloon payment at the end. This will look like this.
• Deposit: £3,000
• Load: £7,000 (£10,000-£3,000) plus interest
• Baloon payment: £10,000
• Total: £20,000 plus interest
So what happens at the end?
When your PCP agreement comes to an end, you have three choices. Therefore, the reason so many people have signed up to PCP car finance deals is because of the flexibility is offers them at the end.
1. First choice is to pay off the balloon payment. This gives you full ownership of the car allowing you to do what you like with it. This option is great if you have come to love the car.
2. Second choice is to hand the car back to the lender. The choice to do this can come down to several factors. You may not be able to pay the balloon payment, in which case you simply hand the car back. The truth is that after 2-3 years driving the car, you may not enjoy driving it or even like it anymore and feel you should hand it back.
3. Finally, if that is the case that you don’t like the car anymore, you can do what the majority of people do and upgrade to a new car. Instead of paying that balloon payment or handing your current car back, the most popular choice at the end of a PCP car finance agreement, is to get a new car in return for your current vehicle.
This comes down to the fact that the car usually ends up being worth more than the balloon payment and you can use that different in value as a deposit. For example, if the balloon payment was agreed at £8,000 at the beginning of the original PCP car finance agreement and at the end of it, the car has been revalued at £10,000, you have £2000 to play with as a form of deposit.
However, you cannot take that extra money if you do hand the car back. Therefore, most people sign up for another PCP car finance deal on a new car.
Potential extra charges
PCP car finance deals usually comes with some additional requirements. These charges occur if you hand the car back to walk away or to upgrade.
At the beginning of the PCP car finance agreement, you set down and agree with the lender how many miles you are planning on doing for each year of the agreement. So for each year you may say you will do 10,000 miles then after three years, you should have done 30,000 miles or less. However, if you go over that, you will ecru over-mileage charges. This is because the more miles you do in a car, the less it will be worth at the end of the agreement. Most finance companies charge 7p-10p for every mile over you are and if you do go dramatically over the agreed number, that cost can quickly add up.
If you damage the car and hand it back, you will likely lose value on the vehicle. This is all because you do not own the car fully whilst on a PCP deal and therefore the value of the car relies upon it returning in good condition.
Is it for you?
PCP car finance is brilliant for those who wish to have the flexibility with regards to what they can do with a car. You may choose a car and love it at the beginning. However, after three years, you may wish to hand it back or upgrade to a newer vehicle and a PCP deal gives you that flexibility.
It is also great for those who know they may not be able to afford the balloon payment at the end because they can simply hand it back without an additional charge, except of course if you have damaged it or gone over your agreed mileage and the vehicle is worth less as a result.
PCP car finance is one of the best options when it comes to looking at buying a car through car finance. Hippo Motor Finance offers cheap car finance on a variety of different cars. Their aim is to reduce the hassle of car finance for you the driver by finding you a car and a car finance agreement based off your budget rather than letting you try to find a car and then source finance elsewhere like most other companies do. Check them out and let them help you get the car and the agreement to suit you and your needs.
