Personal Contract Purchase (PCP)

Meaning and Definition

Personal Contract Purchase (PCP) is a type of car finance agreement that combines elements of a hire purchase agreement and a lease agreement. Under a PCP agreement, the borrower (the individual) makes fixed monthly payments for a specified term, typically between two to four years. At the end of the term, the borrower has three options 1) Return the vehicle to the finance company, 2) Make a final payment, often referred to as the optional final payment or balloon payment, to own the vehicle outright, or 3) Trade in the vehicle towards a new finance agreement.

Why it is important to know

Understanding Personal Contract Purchase is crucial for individuals considering car finance options. PCP agreements offer flexibility and lower monthly payments compared to traditional hire purchase agreements. The ability to choose between returning the vehicle, purchasing it, or trading it in at the end of the term provides options based on the borrower's circumstances and preferences. By understanding the PCP terms and evaluating the future value of the vehicle, borrowers can make informed decisions about their car ownership or renewal plans.

Example in car finance

Suppose an individual enters into a PCP agreement for a car with a purchase price of £20,000. The finance agreement has a term of three years and includes an optional final payment of £8,000. The individual makes monthly payments of £250 throughout the term. At the end of the agreement, they have three options 1) Return the vehicle to the finance company, 2) Pay the £8,000 optional final payment to own the vehicle outright, or 3) Trade in the vehicle and use any equity towards a new finance agreement. The decision depends on factors such as the vehicle's condition, market value, personal preferences, and financial circumstances.