For most people the attraction is the fact that at the end of the finance period they can to step into a brand new vehicle. The downside is that they will never own the car if they opt for a second PCP at the end of the finance term.
However this doesn’t seem to be a deterrent. For most people the lure of a shiny new car is simply too good to pass up.
That said, a PCP is a finance product. As such you have to honour your commitment and make your agreed monthly repayments for the life of the agreement (usually three years) or the vehicle may be repossessed.
A PCP is a flexible form of hire purchase. It differs from traditional hire purchase agreements in that you don’t have to buy the goods - in this case the car - at the end. It is also different to conventional leasing because you build equity in your car during the HP period.
To get the PCP ball rolling a buyer puts down a deposit of up 31% of the value of the new car and agrees a monthly repayment with their dealer. This covers the cost of the car plus interest and depreciation.
When you buy a car with a PCP you will be given a guaranteed minimum future value for the vehicle. This will be enough to pay off the outstanding lump sum at the end.
There are three ways to end a PCP:
- you can hand back the keys at the end of the term and walk away with no further payments.
- you can buy the car from your dealer.
- you can start a new PCP.
If you opt for a new PCP remember, you don’t own the vehicle so all you have towards the deposit on your next PCP car is the equity that has built up in your vehicle during the finance period.
You will only know how much that is when the time comes to change your car. It is then you will discover if you need to top up the equity to cover your next deposit. Right now residual values on used cars are strong because the market was depressed for a number of years and there is a demand for used cars.
This may not always be so.
A prudent move is to put away some money towards the next deposit in addition to your monthly repayment. Otherwise you may find yourself financing a bigger gap than you had bargained for.
Talk to your dealer before you start your first PCP and ask for an example of a plan that has matured on the same or a similarly priced model to the one you’d like to buy. PCPs are up and running in Ireland for over three years and while not all brands entered the market at the same time, a sufficient number of agreements have now matured to enable dealers take an educated guess at how a PCP is going to pan out.
Ask the dealer how much equity had built up and how much the person needed to add to make up the deposit for their second car. Also ask if there was a difference/rise in the monthly repayments they had to make.
The idea is to put down a deposit (usually around 20-22%) that will keep the equity around the same each time for a similarly priced car.
Examples of PCPs in action:
PCP 1: 2012
Model: 316d ES Saloon bought new
Car Price €39,565
Deposit/Part Exchange €8,500
Monthly repayments € 506
Rolled into a second PCP in 2015
PCP 2: 2015
Model: Upgraded to a new 318d SE Saloon
Car Price €43,620
Part Exchange Equity €5,188
Deposit Added €2,500
Monthly repayments € 537
PCP 1: 2013
Model: Renault Fluence saloon Dynamique 1.5
Car price: €23,500
Deposit/part exchange: € 7,250
Monthly repayments: € 272.70
Rolled into a second PCP in 2015
Model: Changed to Megane hatchback Limited 1.5 dCi Car price:
Deposit/part exchange €2,280.99
Monthly repayments: € 283.71