The rise of PCP loans – what you should know

If driving is a large part of your life, it’s a safe bet that you’ll want a good car. Good could mean many different things; perhaps you need a car that’s reliable and efficient. Maybe you need something robust and sizable, or a powerful and fast car capable of zipping you round the country safely and quickly.

However, new cars cost. The model that you need might be far too expensive for your budget, even with a hefty deposit, so you might instead go for a second hand car – which may not have the reliability you’re looking for. Also, there’s something about getting a new car that’s never been driven by anyone else, that’s just more satisfactory.

your keys to a PCP loan

New cars are generally more expensive to insure, and, in the light of new rules regarding road tax, more expensive to get on the road as well. There’s no way of getting around these two issues, but there is a way of taking a brand new motor at less cost – The Personal Contract Purchase.

Here’s how PCPs work: let’s assume that you’ve seen a new Ford that you like, a nippy little Focus RS, that offers enough room and grunt to be practical while retaining the fun factor. There’s one problem – the cost of £31,000. Even with a deposit of a couple of grand saved up, the monthly payments of around £547 or so, over a five-year term, are far too expensive.

With a PCP loan you might be able to get around this. It’s predicted that your Focus will drop in value by several thousand pounds over the length of the three-year spell of the contract, and you pay for that depreciation, rather than the full value of the car. Typically, you now might be able to drive it away for around £300-325 (ex vat) per month - a sum easier to manage in your budget planning - and at the end of your lease term you’ll have the option to buy, or give it back. You’re purely paying for the drop in value of the car, based on what is known as the Guaranteed Minimum Future Value – what the car should be worth at the end of the term providing you’ve looked after it - and can treat it as yours, even though you don’t actually own it.

Many PCP lenders will allow you to choose the spec of your car as if you own it; some will even let you brand it. For an additional fee you could include maintenance as part of the package, which would help in the event of a breakdown/problem.

It sounds great, and there’s no doubt that the UK, Europe and US have taken it on enthusiastically. The lease car market has exploded to the point where, according to the Society of motor manufacturers and traders, about 80% of all cars in the UK are now sold on PCP.

This surge has helped motorists drive cars that would perhaps not have been formerly possible, and cleared a massive logjam for manufacturers who were still struggling sell new cars in the years following the credit crunch. PCP has also increased brand loyalty, as drivers will be contacted regarding an upgrade shortly before their lease expires, when they’ll make the decision to upgrade or purchase the model they’ve been driving.

It almost sounds too good to be true, and of course there are some drawbacks. Settling a PCP deal before it ends can be expensive as you’ll be paying what’s known as negative equity, which basically reflects the fact that cars depreciate far more quickly in the first few months of a lease term than in the last few months. Still, depending on the situation this might be a hit you may be willing to take, and in any event the Car Expert reports that some lease companies are now offering ‘early upgrade offers’ to get you to step up before the end of your term.

Some bloggers have described the arrangement as placing the driver taking on the lease as becoming a ‘slave to the dealer’, based on the constrictions that a PCP confers. PCP arrangements generally have a mileage agreement, limiting you to an agreed distance you can travel per year, and penalties are accrued per mile above this limit. The Garage describes a realistic scenario where someone breaking this arrangement by what equates to a couple of miles a week suffers a £1350 penalty by the end of the three-year term. Another potential penalty could arise if the car has suffered wear and tear - you have to take care of the car to a greater degree than one you own, simply because it’s going to be resold at the end of the term.

Looming in the distance is another potential problem, identified by the Financial Times. In 2017, the market for second hand cars remains buoyant, so at the end of any lease term a lender can be confident that they’ll get a good price for the vehicle, close to the GMFV.

But what happens if this market collapses, and prices start to fall? Lease agreements would become more expensive and/or the GMFVs could fall, meaning that some motorists would be lumbered with making up the shortfall. In other words, the driver of the car would have to pay the difference between the predicted value of the car at the end of the lease, and what it actually turns out to be worth. Also, what effect will Brexit have on the price of cars made in the EU? So far the effect hasn’t bitten, but that might not last. Interestingly, some used cars are starting to be sold on a PCP basis….

PCPs can be summed up in one sentence – for three years you get to drive a new car for a cheaper price than buying it. The pitfall of non-ownership and a restriction on mileage might be too much for some, but perfect for others. Check your circumstances and act accordingly – but just be aware of all factors.

You will also need to pay for :-
2passVehicle Excise Duty (Road Tax)
2passCar Insurance
2passMOT if your vehicle is more than 3 years old