Personal contract purchase
A personal contract purchase is a form of vehicle finance for individual purchasers which has similarities to both personal contract hire and hire purchase (buying on installments.)
A personal contract purchase deal (PCP) requires the customer to pay a certain amount, for a set contract period of somewhere between 24 to 48 months, with the right to drive the vehicle while ownership is retained by the funding company. This is similar to contract hire or car leasing, except that the individual customer has the right to ultimately acquire the vehicle for a previously agreed total cost. Otherwise, the customer can arrange to return the vehicle, without any further liability past the end of the contract.[1]
A personal contract purchase is therefore a conditional sale agreement and therefore under UK law the purchaser is protected under the Consumer Credit Act 1974 and the Financial Services Regulations 2004.[2]
Included items
A PCP may include the element of maintenance during the duration of the contract though this is in the minority of cases. In the UK, the majority of PCP deals include the payment of vehicle tax during the contract period.[3]
Final payment
The final payment, which initiates the actual transfer of ownership, is calculated by the financing company based on its estimates of the future residual value of the vehicle. This final payment is called the Minimum Guaranteed Future Value or the balloon payment.[4]
It may be agreed instead that the final balloon payment is compulsory within the terms of the contract, but that the new owner then retains a right to sell the vehicle back to the financing company at a previously agreed figure, which may or may not be the same as the balloon payment.[5] It’s necessary to fully understand these aspects of a personal contract purchase before signing any deal as a loss may be incurred at this point. This option but not the obligation to acquire the car after a period equivalent to a contract hire is therefore packaged as either an option (in law) to purchase the car (a call option) at a 'set' price, or a right to sell the car (a 'put' option) at a set price after ownership is fully achieved from the final ‘balloon’ payment.
The amount of the monthly payment and final payment is partially determined by the amount of the initial payment (the ‘deposit’) which can be negotiated with the financing company. The financing company is likely to be represented in this discussion by either a car dealer or automotive finance broker.[6]
This form of contract purchase is used more by businesses than individuals, but there has been more use by consumers in countries such as the UK in recent years.[7]
UK
There is a Finance & Leasing Association Arbitration Scheme in the UK, used if there is a subsequent dispute.[8]
VAT is applicable on the entire vehicle price and is capitalized into the monthly payment when calculating the PCP monthly payment.
Unlike Personal Contract Hire, the leasing company can reclaim the VAT, and this means that the monthly payment would be less because:
- the interest charges are applied to the net of VAT cost price i.e. a £20,000 car would be £17,021 without the VAT, giving substantial savings on interest charges
- the depreciation on the car is based on the net of VAT cost price, immediately saving the customer a significant amount of depreciation.
In a personal contract hire, the lessee pays VAT on the monthly payment.