Personal Contract Purchase

A personal contract purchase is a form of vehicle finance for individual purchasers which has similarities to both personal contract hire and hire purchase (buying on installments.)

A personal contract purchase deal (PCP) requires the customer to pay a certain amount for a set contract period of somewhere between 24 to 48 months, leaving a balloon payment to be made at the end of the agreement. The balloon payment is structured so that it will be less than the value of the vehicle at that point in time so that there will be equity that may be used as a deposit on another vehicle purchase. The customer is the registered keeper and legal owner of the vehicle, whilst the finance company retains an interest in the vehicle, which will be noted in the car’s history whenever anyone checks it, so you can’t sell the car without clearing your finance first and if you default on the payments the finance company has the legal right to repossess the vehicle. At the end of the agreement the balloon payment may also be re-financed or the vehicle may be returned to the finance company without any further liability.

A personal contract purchase is therefore a conditional sale agreement and therefore under UK law the purchaser is protected under the Consumer Credit Act 1974 and the Financial Services Regulations 2004.

A PCP may include the element of maintenance during the duration of the contract though this is in the minority of cases. In the UK, the majority of PCP deals include the payment of vehicle tax during the contract period.

The final payment, which initiates the actual transfer of ownership, is calculated by the financing company based on its estimates of the future residual value of the vehicle. This final payment is called the Minimum Guaranteed Future Value or the balloon payment.

It may be agreed instead that the final balloon payment is compulsory within the terms of the contract, but that the new owner then retains a right to sell the vehicle back to the financing company at a previously agreed figure, which may or may not be the same as the balloon payment. It’s necessary to fully understand these aspects of a personal contract purchase before signing any deal as a loss may be incurred at this point. This option but not the obligation to acquire the car after a period equivalent to a contract hire is therefore packaged as either an option (in law) to purchase the car (a call option) at a 'set' price, or a right to sell the car (a 'put' option) at a set price after ownership is fully achieved from the final ‘balloon’ payment.

The amount of the monthly payment and final payment is partially determined by the amount of the initial payment (the ‘deposit’) which can be negotiated with the financing company. The financing company is likely to be represented in this discussion by either a car dealer or automotive finance broker.

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Wikipedia