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Car Finance Explained

What is PCP?

PCP (Personal Contract Purchase) is the most popular form of motor finance because it gives the customer flexibility at the end of the agreement and a lower monthly payment compared to alternative products like Hire Purchase, or Conditional Sale.

What is the process for the customer?

The customer will:

1. Usually pay a cash deposit or part exchange their old vehicle as a deposit (or both).

2. Agree a mileage allowance and term over which the repayments are made. This will determine the monthly repayment. The more the customer uses the vehicle the higher the monthly payment will be.

3. Be informed by the retailer how much the Guaranteed Minimum Future Value (GMFV) of the vehicle will be. This is often called the optional ‘balloon’ payment or optional final payment.

4. Sign the credit agreement and take delivery of the vehicle. The agreement will outline any fees or charges that are payable.

5. Make all of their monthly payments – typically payments will be structured between 2 years (24 months) and 4 years (48 months) depending on the customer’s preferences and circumstances.

6. Before the end of the agreement the customer will be asked by the finance provider whether or not they would like to own the vehicle by paying the GMFV. The customer might also have to pay an Option to Purchase fee, depending on what is set out in the credit agreement.

7. The customer has three options at this point:

  • Pay the GMFV (and any Option to Purchase fee due) and take ownership of the vehicle.
  • Hand the vehicle back and make no further payments, subject to mileage and vehicle condition, (‘wear and tear’).
  • Part exchange for a replacement vehicle by using any proceeds (‘equity’) gained if the amount the retailer is prepared to pay for the part exchange is more than the GMFV payment due.

Frequently Asked Question:

Who is the product suitable for?

  • Customers who would like to have options at the end of the term, and a lower monthly payment.
  • The product can be made available to both consumers and business customers.

What else does the customer need to know?

The finance provider owns the vehicle until the point the customer has made all necessary payments, including the GMFV and Option to Purchase fee. The customer is therefore not entitled to sell the vehicle before this time.

As the GMFV is deferred to the end of the agreement, the monthly repayment is lower for a PCP because the customer is only paying back a proportion of the total amount of credit as part of their monthly repayments. Effectively the customer is therefore initially only paying to use but not own the vehicle.

If the customer opts to hand the vehicle back at the end of the term, or earlier in the agreement, they might be required to pay charges set out under the credit agreement:

If the mileage allowance is exceeded – the customer will be required to pay a pence per mile charge.
If the vehicle is damaged beyond ‘reasonable wear and tear’ – the customer will be required to pay a damage charge.

The customer can ‘voluntarily terminate’ their credit agreement before the final payment is due but (as set out in the credit agreement) will be required to:

Hand back the vehicle to the finance company.
Pay, or have paid, at least half of the total amount owed.

The customer is not guaranteed to have any ‘equity’ in the vehicle at the end of the agreement.

What is CONTRACT HIRE?

Contract Hire is a form of flexible leasing to fund the use of a vehicle. The customer (‘lessee’) may never take title to (‘own’) the vehicle.

Who is the product suitable for?

  • Customers who do not want to own the vehicle and are happy to hand it back after a specified period.
  • VAT registered businesses – because the monthly rental includes VAT which the business can claim back.
  • Personal Contract Hire (PCH) has also become a popular method of financing the use of a vehicle for consumers.
  • Servicing plans, maintenance plans and road tax payments can often be incorporated into Contract Hire agreements to provide the customer with a fixed cost of motoring. This helps consumers and businesses with planning and budgeting.

What is the process for the customer?

Agree a mileage allowance based on the maximum number of miles they are likely to travel each year – the more the customer uses the vehicle the higher the monthly payment will be.
Make an advance rental payment – usually 3 or more rentals (monthly payments) are paid in advance.
Sign the hire agreement and take delivery of the vehicle.
Pay all of their remaining monthly rental payments.
Hand back the vehicle at the end of the agreement.

The amount the customer pays overall will be the total amount the vehicle depreciates over the term plus interest and any additional charges.

What else does the customer need to know?

  • The finance provider (‘lessor’) owns the vehicle – the customer is therefore not entitled to sell and must make sure it is kept in good condition.
  • If the mileage allowance is exceeded the customer will be required to pay a pence per mile charge to the lessor – set out in the hire agreement.
  • If the car is damaged beyond ‘reasonable wear and tear’ the customer will also be required to pay charges – set out in the hire agreement.
  • The customer can terminate the hire agreement early but early termination charges are often applied and can be high. The charges will be set out in the hire agreement.

What information do I need to provide in order to apply for car finance?

  • The application is simple and very easy to fill, all we need to know is :
  • Your name and date of Birth
  • Your contact details
  • 3 years address history
  • Your employment history and income

How does it affect my credit score?

We will initially do a soft search in order to find the best finance options for you . A soft search does not affect your credit score. If you decide to accept any of the offers then we will proceed with the hard search.

Can I exchange my current car?

Yes we accept part exchange, the process is simple. The market value of your current car will be deducted from the price of your chosen car. Any outstanding balance on your current car will be settled

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