If you’re looking at options for car financing, you might be looking into Personal Contract Purchases, or PCPs. PCPs are attractive to car buyers, because they allow you to buy a car in instalments over a number of years, while getting to use the car. However, are they as great a deal as they first appear?
What's Included?
What is a Personal Contract Purchase?
A Personal Contract Purchase, or PCP, is a long-term contract that allows you to use a motor vehicle without having to buy it outright.
When the contract ends, you can give the car back, buy it for its resale value, or use the resale value to buy a new car.
A PCP is a form of credit, so you need to prove you’re creditworthy to enter one. This means you need to pass a credit check and pay a deposit.
Be aware that the agreement will last years, so be sure to pick a reliable vehicle that will last the life of the contract.
A PCP does not work in the same way as a mobile phone contract that includes a handset. You will not own the car at the end of the contract period, and if you want to keep it you will have to pay extra on top of what you’ve already paid.
How Personal Contract Purchases work
Before you apply, ensure that you are creditworthy. If that’s okay, be sure that you have enough money saved up to pay a deposit, which is usually 10% of the value of the vehicle.
When you apply, the lender will check that you pass their credit checks. If you do, they will then ask you to pay a deposit. Once you’ve paid the deposit, they’ll finance the vehicle.
You can use the car, but make sure to read the terms of your contract. Lenders are often sneaky about exactly how they want you to use the car.
When the contract term ends, you have a few options for what to do next.
If you want to keep the car, you can pay a final “balloon payment”, which is a lot bigger than your regular payments. This payment is calculated at the start of the contract, based on how much the lender thinks your car will be worth at the contract’s end. This final payment lets the lender avoid any losses they might make due to changes to the car’s resale value.
You can also hand the car back, making no further payments. You can also pay off the resale value, and use this as a deposit to get a new PCP with a new car.
What credit score do you need for PCP finance?
For a Personal Contract Purchase, you need to be able to prove that you can make the payments each month. We call this creditworthiness. It’s the same thing used to determine whether you should be approved for personal loans, mortgages, credit cards and mobile phone contracts.
What credit score you will need will vary between the main Credit Reference Agencies. Equifax, Experian, TransUnion and Crediva all use their own scoring systems. It’s worth noting, as well, that lenders don’t always use your credit score to determine whether they should lend to you. Instead, they use your credit report, which contains a much more detailed breakdown of your credit history.
With Credibble, you can see what a lender will see when you apply for credit. Rather than just a flat score, Credibble shows you exactly which points you need to improve. The 24-Factor Credit Check helps you to make informed decisions to improve your creditworthiness. Before taking out a PCP, consider joining Credibble.
What PCP providers look for in an applicant
Your credit report doesn’t tell the whole story when it comes to Personal Contract Purchases. Think ABC.
Affordability
Just having a good credit score isn’t enough. You also need to prove that you have enough income to meet the criteria. You could have the cleanest credit report in the world, but if you can’t afford to make the payments every month, the provider will reject your application.
Buying the right car
Not all cars are created equal. Some are riskier than others. A nice Volkswagen hatchback or a Vauxhall saloon isn’t likely to raise a lender’s hackles. A Lamborghini or a Mustang is.
Even some flash consumer models, like BMWs or Jaguars, may be a cause for concern. If you’re looking to take out a PCP, be sure to stick with something reliable and reasonable.
If you really are dead-set on taking out a PCP on a flash car, be aware that you will be subject to higher fees from specialist lenders.
Creditworthiness
And of course, you need to prove that you’re creditworthy. This simply means that you have a credit report that will encourage lenders to see you as a reliable borrower. This means paying rent and bills on time, keeping up with credit card payments, and so on.
What to consider when applying for Personal Contract Purchases
Right up top, it’s important to know that PCP lenders, like all lenders, are in it to make money. They don’t lend money out of the goodness of their hearts, they want to make money off of your need to borrow.
With that in mind, there are a few pitfalls to be aware of.
Because you don’t own the car, you need to take special care to make sure the car is kept in good condition. Read your contract to make sure you know your mileage limits, and ensure you don’t damage the car during your time using it.
Also bear in mind that if you try to cancel the PCP early, there will be a charge to get out of it.
Close to in five people who take out a PCP don’t end up buying the car afterwards, and end up paying for a new PCP to cover the cost. Four out of five end up giving the car back when the contract is up. If car ownership is your goal, a PCP may not be the best option for your circumstances.
Alternatives to Personal Contract Purchases
If you feel that the disadvantages of a Personal Contract Purchase outweighs the benefits, there are other options.
If you’re not looking to own a car, only use it, a PCP is probably not your best option. Af Personal Contract Hire cuts out the middle-man and lets you hire a car to use, with the understanding that you will give it back in good condition at the end of the contract period. PCH works out cheaper than PCP.
If you are looking to own a car, it may be better to consider taking out a personal loan, or saving up to pay for one in full. A PCP offers a kind of “middle ground” between car hire and car ownership, but it can work out more expensive than either option.
Whatever you decide to do, make sure you’re creditworthy by joining Credibble today. Start your journey towards credit approval for the things that really matter.
Crediblle offers two fabulous solutions.
If you’re preparing to take a mortgage, never apply until you’ve tried our unique and FREE Credibble Home app. Our smart technology will tell you what you need to fix so you avoid rejection. The app predicts when you will be able to buy, for how much and tracks your month-by-month progress to mortgage success. We’ve even added your own mortgage broker, so you get the best deals available.
More focused on your credit rating? Well, get started for free with Credibble’s 24- Factor Credit Check to truly help you improve your creditworthiness and how lenders view you. (Remember: lenders don’t use your credit score! We’ll show you what lenders look for and how to get your credit report in the best shape possible).
