Personal Contract Purchase
This is similar to hire purchase but involves a final payment - also called the 'balloon' payment or minimum guaranteed future value. The lending company will assess how much they think your car will be worth at the end of the agreement after your last monthly payment - this amount will be deducted from the amount you have to borrow which, in turn, keeps your monthly repayments lower than normal hire purchase.
Say, for example, your new car cost £10,000 and your deposit was £1,000, this would leave you needing to borrow £9,000. If you borrowed this over 24 months, the company would decide how much your car would be worth at the end of that time - lets say £4,000. This £4,000 is deferred from the £9,000 until the end of the agreement, leaving £5,000. Your monthly payments are then calculated to pay back £5,000 instead of the £9,000 - reducing your payments substantially.
Because most people calculate what they can afford on a monthly basis, this method means that you can either pay less than hire purchase, or get a better car. Sounds great? There's a down side.
Naturally the balloon payment at the end of the agreement needs to be repayed. This means the car does not belong to you until that payment is made. You can either make that payment (bear in mind it might be quite a large amount), give the car back and walk away with nothing, or swap to another PCP scheme. Of course, if the car turns out to be worth more than the balloon payment, you can use the difference as a deposit for your next car.
Overall, the amount you pay is likely to be higher than hire purchase, but it reduces your monthly payments. Only you know which you would prefer - this can be a good method for first time buyers with a small deposit.
As with hire purchase, you can click on the link below to see a chart of your monthly repayments after the deposit and balloon payment have been removed from the purchase price.
