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A Guide to Personal Contract Purchase

GoCardless
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Last editedApr 20222 min read

Even in the age of the remote workforce, many SMEs like yours need to use vehicles. They’re essential for making deliveries, mobilising your sales force, and transporting equipment from one site to another. But in this precarious financial landscape, many SMEs don’t have the working capital to purchase a vehicle outright. But how best to finance your new company vehicle?

There are a couple of options available to you. The most common forms of vehicle finance are personal contract purchase (PCP) and hire purchase (HP). Here, we’ll take a closer look at the former and its prospective advantages and disadvantages for your company’s cash flow.

What is a personal contract purchase?

Personal contract purchases (PCPs) are a form of vehicle financing. They are popular because of their flexibility and relative affordability. Vehicle retailers partner with a handful of finance companies to offer PCPs to customers who want to keep their options open.

How does a personal contract purchase work?

Under a PCP contract, the customer can drive the vehicle for a fixed period of time, while keeping to a prearranged mileage. The customer pays off a portion of the vehicle’s value in monthly instalments. Usually by direct debit. At the end of the agreement, the customer can either pay a final ‘balloon payment’ and keep the vehicle, return it to the finance company, or upgrade it for a new vehicle.

Under the PCP agreement, an estimated final value will be assigned to the vehicle. If the vehicle has been well maintained and the final valuation exceeds this value, the customer can either pocket the difference or set it against a new vehicle.

On the other hand, if the vehicle has fallen into disrepair and the final valuation falls below this estimated final value, the customer will be expected to make up the difference. What’s more, if the vehicle exceeds the agreed mileage, the customer will be expected to pay (usually around 12p per mile) for every mile over the agreed limit.

Personal contract plans vs hire purchase: What’s the difference?

PCP and hire purchase plans work in similar ways. However, they have some key differences. In a hire purchase agreement, credit is extended for the full value of the car. So, the customer owns the car outright when the contract is complete, with no need for a balloon payment. However, because of this the monthly payments are invariably higher than they would be for the same vehicle on a PCP.

Like PCP, hire contract plans usually last for around three to four years, although they can last anywhere between one and five.

If you’re interested in taking ownership of the vehicle sooner, hire purchase will be the better option for you. If you want to keep monthly payments low, you’ll be better off with PCP.

Personal contract purchase advantages

  • monthly payments are lower than a hire purchase on the same vehicle

  • payments are covered by the Direct Debit Guarantee

  • PCPs are flexible. You may be able to upgrade your vehicle mid-contract while still paying a similar monthly figure

  • you can get a new, reliable vehicle every few years at prices that are often favourable to leasing

  • customers are partially insulated against depreciation in value

Personal contract purchase disadvantages

  • you only own the vehicle after making the final balloon payment

  • mileage limits may frustrate those wanting to use the car for professional purposes

  • charges may apply if the vehicle is not returned in good condition

  • you may not be able to make any modifications to the vehicle

  • you will not be able to sell the vehicle as you do not own it

We can help

If you’re interested in finding out more about personal contract purchases and how they can benefit your business, get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.

Over 70,000 businesses use GoCardless to get paid on time. Learn more about how you can improve payment processing at your business today.

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