To buy on a PCP, or not to buy on a PCP?

To buy on a PCP, or not to buy on a PCP?

I’m often asked which is better, purchasing a new or used car on a PCP (Personal Contract Purchase) or simply buying the car outright? Alas the answer isn’t straightforward as it really depends on the individual and their financial preferences.

The age old “if you can’t afford it, don’t buy it” has been cast aside as automakers have either created inhouse finance departments or aligned themselves with credit providers to offer car buyers the chance to purchase a new or used car with a deposit, followed by monthly instalments. This has become a very popular option as buyers no longer need to save up the full amount to purchase a car. Meanwhile, any household savings can be put towards other things (holiday abroad, perhaps?), or so the theory goes…

Typically, a PCP deal will run anywhere between 2 and 5 years. In a PCP deal you never own the car yourself; while your name goes into the logbook, the legal owner of the vehicle is the finance company from whom you have borrowed the money. As such, at the end of your lease term you’ll have to decide if you want to either a) simply return the car with no additional costs to you, as long as the car is in good condition and hasn’t exceeded the agreed mileage, b) purchase the car for a pre-determined amount, often referred to as the Guaranteed Future Value (GFV) or balloon payment or c) return the car and put a deposit down for a new car, hopefully using any surplus money available above the GFV (although this is quite unlikely!).

Unsurprisingly, option c) is the most popular. Getting a new car every three years (for example) for similar monthly payments as your previous agreement is easy to digest, financially speaking. Also, not only do you get the latest model with the newest features, but you also get a new warranty, thus mitigating concerns of potentially expensive repair bills. 

However, there are a few things to be mindful of when acquiring a car on a PCP deal. First and foremost, it does come at a cost. A useful number to look at in a PCP proposal is the “total amount payable”, typically found at the bottom of the contract. This shows you exactly how much you’ll be paying above the original sticker price for the convenience of paying in monthly instalments. For example, a £30k car financed over 3 years could end up costing close to £33k after the deposit, 36 monthly payments and GFV have all been paid. An extra £3k over three years isn’t a huge amount, per se, but does indeed represent a premium. Secondly, like a mobile phone contract, one must be sure they can keep up with the monthly payments or penalties will be levied. And lastly, most finance companies won’t let you sell the car without settling the finance first. So, if you don’t like your car after owning it for just a few months and want to swap it for something else, not only will it be a massive paper-work hassle, but it will cost you financially, too.

There is no simple answer as to whether a PCP deal is better than buying the car using cash. Each has their pros and cons. Using saved money to buy a car outright makes you the sole owner of the car, gives immediate clarity on your bank balance and gives you the flexibility to do what you want with the car (don’t like it? Sell it!). But maybe you can spend your savings elsewhere? Also, for those who don’t have an abundance of savings but need a reliable car, spreading payments out over a longer term through a PCP is an attractive option, despite coming at a cost.

But before you do anything, Car Sleuth recommends that you get in touch to go over the options to see which is best for you!

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