How a Personal Contract Plan (PCP) works

Personal Contract Plans (PCPs) have become very popular in recent years, because they take a lot of the hassle out of car ownership - but as you might expect, they're not the cheapest way of getting on the road.

With a PCP you’re effectively just funding the depreciation on your new car, and unless you buy the car at the end of the contract, you never get to own it.

It’s a bit like perpetually renting a home rather than getting onto the property ladder

It's a bit like perpetually renting a home rather than getting onto the property ladder; you could view it as dead money or as a way to get on with your life rather than being bogged down by the realities of ownership.

This is how a Personal Contract Plan works:

  • As with hire purchase, you pay a deposit and monthly instalments; the difference is that the monthly payments are generally lower.
  • PCPs are popular as many schemes include maintenance in the price. While new cars need very little in the way of maintenance, if you keep the car for (say) four years and you go right up to the mileage limit, the garage bills could be a bit steeper. But you'll always be paying for the convenience so a PCP will never be the cheapest option.
  • There’s a final payment called the minimum guaranteed future value (MGFV), also known as a balloon payment. This is usually a large sum, which means you either have to stump up to buy the car outright, walk away with nothing, or swap to another PCP scheme to keep you on the road.
  • There’s usually a mileage limit, which can’t be exceeded without the payment of a stiff penalty at the end of the contract.