Price often right on popular PCPs

Andy Russell, motoring editor. Twitter @andyrussellauto

If I had a pound for every time I have been asked for a bit of motoring advice, normally while on the driveway washing our car, I would have enough to put it through the car wash each week!

Last week a retired neighbour asked me what PCPs are whether it would be a good way for him to get his next car.

PCPs – or personal contract purchases – have been credited with the big rise in cars bought on finance and helped boost sales month after month.

A PCP is similar to hire purchase (HP) but instead of paying off the entire value of the car in monthly instalments, you pay a deposit and effectively only the depreciation so making monthly payments less. And many manufacturers offer deposit contribution and subsidised APRs.

At the end of a PCP agreement, generally 36 months, you can either pay off the pre-agreed outstanding value to own it outright, give it back or start another PCP on a new car.

The guaranteed minimum future value (GMFV) – often called the balloon – is the key to how a PCP works. The finance company calculates the car’s predicted minimum value at the end of the agreement – the deposit and monthly payments pay off the difference between the buying price and this predicted value. If your car is worth more than the GMFV you can use the extra money as deposit towards your next car.

So back to my bit of neighbourly advice about why a PCP suited him.

Being retired he had a decent monthly pension so could afford a couple of hundred pounds or so each month.

He had money in the bank but, being a great traveller, preferred to use some of his savings seeing more of the world while he still fit.

He now covers only 5,000 to 6,000 miles a year and the lower your mileage the higher the GMFV.

He looks after his cars so no damage penalties when returning it.

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