Is PCP a good deal?

PCP stands for personal contract purchases, and is an increasingly popular method of car payment. It allows “buyers” to pay a fixed monthly rate for a new car, usually in contracts of around 3 years. According to the published statistics by the Finance & Leasing Association, last year 78.1% of new cars were purchased by private owners using credit, a majority of which were PCP purchases.

In short, leasing a car allows you to pay for a new car by covering the costs of depreciation over the course of the contract, plus a little extra for the contract provider. It is easy to see why PCP is an inviting concept for drivers. You can put down generally affordable monthly sums and drive away cars that you may not necessarily be able to afford otherwise.

The following is a made up scenario to explain, in the simplest form, how PCP works.

Example:

A new Ford Focus costs £10,000 when the contract is started, and is expected to depreciate to a cost of around £5000 after the three years. That means that the driver will have to pay the £5000 over the three years, including extra fees for the leasing company. In this example, total costs for the three years are £6500. After putting down a deposit of £3000, the driver would then have to pay £194 every month for the three years. At the end of the contract, the driver could then pay the remaining £5000 to buy the car if they wished.

In a bit more detail, once the contract is up you’ll have three options open to you. The first is to simply return the vehicle. You can then decide to take up a new PCP contract on another car or simply walk away, it is up to you. The second and third option that you could entertain is to either purchase the car at its depreciated, end of contract price, or put any equity towards a new contract.

The most obvious downside of the usual PCP contract is that you don’t own the car at the end, though there is still the option of purchasing the vehicle by paying the remaining value.

Less obvious is the quality of the contract itself. It is difficult to work out the best deal with leasing cars, as the depreciated value is largely estimated. Plus, somewhat counter intuitively, it is generally best to find a more popular car which will depreciate less, to make the most of your deal.

Make sure you fully plan out a budget for PCP contracts as some more inviting deals, offering leasing costs as low as £99-per month, may not be the best deals. These could involve ramping up the price through deposits, additional company takings or restricted mileage.