Personal Contract Purchase

How it works

Personal Contract Purchase (PCP) is like a lease purchase agreement (an HP agreement with a balloon) but where the driver has various options at the end of the agreement. He/she can either return the vehicle or pay the balloon payment and keep or sell the vehicle. The balloon payment relates to the anticipated value of the vehicle at the end of the term based on the mileage set at the start of the contract. This end value is known as the guaranteed minimum or future end value (GMEV or GFEV).

Popular with...

People who like to change their cars on a regular basis and who like to have a guaranteed value. This has been particularly useful with the unsettled market.

Risk

The individual can have the option to buy the vehicle without assuming any residual value.

Advantages

Low initial outlay
The individual has the option to either purchase or return the vehicle at the end of the contract.
The contract can be determined at any time subject to payment of the settlement figure.
Maintenance of the vehicle can be included as an option.

Disadvantages

PCP is not as tax-effective compared with Personal Contract Hire (PCH) if used for business
It is important to correctly assess your annual mileage as an excess mileage applies at the end of the agreement. It may however be possible to reschedule your mileage during the contract if you incorrectly estimate it, or your circumstances change

Summary

PCP is becoming more and more popular with people looking at their tax liabilites in relation to company motor vehicles, and people who previously purchased vehicles using the traditional HP method.

Personal Contract Hire

How it works

Personal Contract Hire (PCH) gives the user a fixed equal monthly rental for a fixed contract term and mileage. At the end of the contract the vehicle is simply handed back.

Popular with...

Company car drivers who are given a car or mileage allowance instead of company vehicle. It allows the individual to make his/her own choice and arrangements. This will avoid benefit-in-kind taxation.

Risk

The funder assumes the risk of the residual value of the vehicle.

Advantages

Low initial outlay
More tax-effective than a Personal Contract Purchase (PCP) if the vehicle is used partly for business use
The contract is not subject to a final balloon payment
The contract generally includes road fund licence at the current rate for the complete term of the agreement
Maintenance of the vehicle can be included as an option

Disadvantages

It is costly to early terminate the agreement
It is important to correctly assess your annual mileage as an excess mileage applies at the end of the agreement. It may however be possible to reschedule your mileage during the contract if you incorrectly estimate it, or your circumstances change

Summary

Overall, a convenient and hassle-free funding method with tax advantages.