Personal contract purchase is not available to businesses and can only be agreed by private individuals. This type of lease will give you the option to purchase the vehicle or return it to the finance company at the end of the contract.
With PCP, you will make an initial deposit followed by subsequent monthly installments which effectively covers the depreciation in vehicle value. These monthly installments are not subject to VAT, however any additional services you add will have VAT payable on the service costs.
How does it work?
When taking out PCP you are required to initially pay a deposit. You will then make regular monthly payments across a predetermined period (e.g. 24 months). These payments will effectively cover the vehicle’s depreciation. Because of this, when the agreement ends there is an outstanding balance for the vehicle still to be paid.
This is often known as a ‘balloon payment’.
You can choose to pay the balance and then own the vehicle outright or you can choose to return the vehicle to the finance providers. This amount is agreed at the start of the contract as the minimum guaranteed future value (or MGFV).
Your monthly cost is calculated by deducting your deposit and MGFV from the current value of the vehicle.
It is worth noting that personal contract hire is often more popular and common than personal contract purchase. This is because they offer more flexibility at the end of contract term than a personal contract purchase agreement.
If you’ve got further questions about which type of lease contract is best for you, take a look at the information we’ve provided on each of the different contracts. Alternatively, give our team a call on 0345 811 9595.
What happens at the end of the contract?
At the end of the contract, you have three options:
- Do not pay the balloon payment and return the vehicle to the finance company
- Pay the balloon payment outright and own the vehicle
- Refinance the final rental amount if applicable, subject to approval (Pay the balloon payment over further monthly installments) and then own the vehicle
This decision does not need to be made until you are coming towards the end of your agreement.
What do you need to know?
- A minimum guaranteed future value (MGFV) – or balloon payment – is agreed at the start of the contract
- Fixed monthly installments cover the rental of the vehicle (plus any additional maintenance) throughout the duration of the contract
- The monthly payments are calculated by taking the following into consideration:
- Retail value of the vehicle
- Length of agreement
- Minimum guaranteed future value and deposit
- Mileage allowance (as chosen by you before the start of your contract)
- Any additional options, such as a maintenance package
- At the end of agreement, when all payments have been made, ownership passes to the customer – if you choose to not return the car
- Vehicle tax is provided for the first 12 months
How could it benefit your business?
- Low initial rental
- Fixed installments for the entire duration, making budgeting easier
- Flexible terms to meet your personal finance requirements and driving habits – with variable contract duration and mileage terms
- Maintenance of vehicles can be included in the monthly installments, spreading the cost
- The finance company guarantees the resale value of the vehicle at the end of the agreement which means you have no risk of negative equity
- Ownership passes to you at the end of the agreement, if you choose to make the final balloon payment
- Allows you to drive the car of your choice without the risk – if you’re happy with the vehicle at the end of your contract, you can choose to keep it. If not, or there’s another car you’d like to try for a few years instead, you can simply hand the vehicle back