Car leasing has numerous advantages over buying a car outright, but it also has one major drawback - the car is never yours. So what if you could combine all the advantages of a regular car leasing deal, but also have the option to own the vehicle outright?
Well you can, thanks to a process known as personal contract purchase (PCP). Personal contract purchase agreements are growing in popularity and are actually a straightforward method of car finance as this guide to personal contract purchase will explain.
Broadly, personal contract purchase is the same as a personal contract hire agreement - but with one key difference.
At the end of the contract, there is an optional balloon payment that the individual can choose to pay in order to take ownership of the vehicle. This amount is determined at the outset and allows the driver to keep the vehicle if they are happy with it. However, it is not essential - on the contrary, as with a personal contract hire deal, you could choose to return the car to the leasing company and walk away.
Monthly payments are based on the difference between the retail value of the car and the residual value - i.e. the estimated future value of the vehicle after depreciation is taken into account. Therefore, the more the vehicle holds its value, the better your personal contract purchase deal will be as that will reduce your monthly payments.
A mileage limit will apply to all personal contract purchase deals. This is because the leasing company will use the mileage limit to determine the vehicle's depreciation and therefore its residual value. So it's important to be honest with the leasing company about how much travelling you are likely to do - exceeding the mileage limit will lead to penalties.
Personal contract purchase is seen as a direct alternative to hire purchase and is subject to the protections set out in the Consumer Credit Act.
There are many advantages to personal contract purchase including:
There are very few disadvantages to a personal contract purchase deal but it is usually more expensive than hire purchase agreements. It's also worth remembering that you will have to arrange comprehensive car insurance as the car will not be yours until the balloon payment is made.
Generally, personal contract purchase is seen as the ‘best of both worlds' in that you can choose to walk away from a deal, or exercise the option to buy.
Overall, personal contract purchase will generally be more expensive than traditional contract hire and hire purchase deals, but monthly payments are low. If you travel fixed distances and have a stable lifestyle, the mileage issue should not be a problem.
Consequently, personal contract purchase deals are well-suited to people who want to drive a car that would otherwise be unaffordable and who want to keep their options open with the right to buy.
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