When you enter into a PCP agreement, the finance provider determines the Guaranteed Minimum Future Value (GMFV)—also referred to as the Residual Value (RV)—which represents the estimated worth of the car at the end of the contract. This value is calculated based on several factors, including:

• The car's initial price
• Predicted mileage over the contract term
• Expected depreciation

Upon reaching the end of your PCP term, you have several options to choose from:

• Make the Final 'Balloon' Payment: Pay the GMFV to take full ownership of the vehicle.
• Return the Car: Simply hand back the vehicle to the finance provider, subject to mileage and condition terms.
• Part-Exchange: Trade in your current car for a new model using any equity remaining in the vehicle.
• Refinance the Final Payment: Extend the agreement by financing the outstanding GMFV.

PCP is ideal for those who prefer lower monthly payments, enjoy driving a new car every few years, and want flexibility at the end of their contract. However, it is essential to consider mileage limits, potential excess wear-and-tear charges, and the final balloon payment if you intend to keep the vehicle.

By understanding how Personal Contract Purchase works, buyers can make an informed decision that aligns with their financial situation and driving needs.

When you enter a PCP agreement, the finance company estimates how much your car will be worth at the end of the contract, considering factors like your predicted annual mileage and the car's age.

This estimate, known as the RV/GMFV (Residual Value/Guaranteed Minimum Future Value), determines how much you'll need to pay.

During the contract, you'll pay the difference between the car's price and the predicted RV/GMFV, spread out over your monthly payments.

The interest rate you get depends on your personal situation, including your credit history and the size of your deposit.

These finance deals are popular because they typically cost less per month than other car finance options.

During the contract, you're not paying the full value of the car, and at the end, you can choose to keep it or switch to a different one. It's a great way to try out a car before deciding to buy it.

Here are the things to be aware of when considering a PCP agreement:

• Partial Repayment: Unlike traditional loans, you're not repaying the full value of the car. Your monthly payments cover its depreciation plus interest. If you want to keep the car, you'll need to make a final balloon payment.
• Ownership: You don't own the car outright; you're essentially renting it from the finance company. You can't sell the car while it's under finance without the company's permission.
• Mileage Limits: PCP agreements often come with mileage limits. Exceeding these limits can lead to extra charges, so it's important to monitor your driving.
• Car Condition: When returning the car, it should be in good condition, with only reasonable wear and tear. Excessive damage may result in additional fees.
• Interest Rates: Pay attention to the interest rates on PCP deals. They can be competitive, but it's crucial to understand the total cost of borrowing.

Eligibility depends on several factors, including your credit score, income, spending habits, and any existing debts. The value of the car you want also plays a role—be sure you can afford the monthly payments. If necessary, consider a more affordable car.

Yes, the lender will typically perform a credit check as part of your application. This will appear on your credit file, and too many checks in a short space of time can affect your credit rating so try to avoid that if possible. Learn more about credit ratings, and what to do if you have a bad credit rating.

A PCP is a type of hire purchase. The key difference is that with PCP, your monthly payments cover only part of the car's cost, with the rest deferred to a final payment, known as the balloon payment, at the end of the agreement.

Although the car is bought in your name, the finance is secured against the car, similar to a mortgage on a house. This means the lender has a financial interest in the car and can prevent you from selling it until the finance is fully repaid. In practical terms, the lender effectively owns the car, even though the paperwork is in your name.

You are not able to directly swap your car within a Personal Contract Purchase (PCP) agreement. However, you can settle your current PCP and start a new one for a different car.

The finance broker will make this transition feel seamless, but keep in mind that you'll be ending one finance agreement and beginning another, rather than simply swapping cars.