Personal Contract Purchase (PCP)

Personal Contract Purchase, or PCP, is a variation of a Hire Purchase agreement. The key distinction is that the estimation of the car toward the finish of the agreement is ascertained toward the beginning of the understanding and this esteem is conceded. This conceded whole is normally alluded to as the Guaranteed Minimum Future Value (GMFV) and depends on various elements including how old the car will be toward the finish of the agreement and how many miles it is expected to have covered. The future value of the car is guaranteed by the lender so will not fluctuate. Conceding the GMFV to the finish of the understanding along these lines implies that your general regularly scheduled installments are lower than those on a practically identical HP agreement over a similar term.

A PCP agreement additionally gives you the adaptability to choose whether you might want to possess the car inside and out toward the finish of the agreement by paying the conceded esteem (GMFV),or returning the car to the lender and entering into a new car finance agreement.

At the Beginning of the Agreement

Under a PCP agreement, you concur with the dealer the sum you need to borrow, less any deposit and the estimation of any car you are part-trading. Your dealer at that point presents your application for finance to the motor finance companies and, if you pass their credit checks, the lender pays for the car on your behalf.

During the agreement, you pay the maximum of the car in addition to interest, minus the guaranteed future value of the car. This implies the regularly scheduled monthly payments are generally short of what they would be under a comparable HP understanding over a similar term.

At the end of the agreement

You will have three choices:

  • You can either pay the guaranteed future value in full and own the car outright
  • Hand back the keys and leave
  • Exchange the car in by utilizing any current value (if the guaranteed future value is actually lower than the current market value of the car) as a deposit for a new finance agreement.
  • In the event that you need to hand the car back however have surpassed the estimate mileage you agreed toward the beginning of the agreement, you will need to pay an excess charge.
  • You can in part or completely settle a PCP agreement whenever, yet should check the terms and conditions of the agreement as each finance company has its own procedures on how to do this.

Advantages of Personal Contract Purchase

  1. Lower monthly payments than Hire Purchase for a practically identical car and term.
  2. A low deposit toward the beginning of the agreement.
  3. Unless you quit, your agreement will be regulated which implies you have certain legal rights and protections.
  4. Flexibility toward the finish of the agreement on what you might want to do with the car.
  5. Fixed monthly payments throughout the term of the agreement.

Things to remember

PCPs could work out more costly generally speaking than a Hire Purchase understanding for a comparable car, particularly in the event that you choose to go into a moment back consent to pay the conceded future estimation of the car toward the finish of the underlying PCP agreement .

  1. Be watchful how you gauge your yearly mileage as you'll be charged for each extra mile.
  2. If you return the car, it must be in great condition and any damage will be charged to you.

How to understand your credit report

As we have already explained, your credit report shows a snapshot of your credit history and payments over a certain period of time. Three major credit reporting agencies provide their own report on your credit each month and by going onto their sites online, you can look at your file and make sure that it is in good condition. The three key sites are:

  1. https://www.experian.co.uk/
  2. https://www.equifax.co.uk
  3. https://www.clearscore.com

Whichever report you look at, it will show pretty much the same type of information such as:

  1. Account information – this is a list of all open credit accounts· Enquiries with regard to credit – if you have made applications for credit or finance then these will be shown unless they are ‘soft’ searches which do not leave a trace. ‘Hard’ searches will show and too many can have a detrimental effect so if you make one and get turned down, think again before applying too quickly. It may be best to focus on applications that are regarded as soft searches only.
  2. Information with regard to public records – this will be things such as information from the courts appertaining to bankruptcy or judgments made. Anything such as this will impact negatively upon your credit file.
  3. Credit paid in instalments – such as a car loan or a mortgage. Very commonly used and usually fairly easy to comprehend, you borrow a sum from a lender and pay it back to them with interest added in instalments of a set sum. This will be for the life of the loan, which can be a few months or years, depending upon what term you choose.
  4. If you look at your credit report and find inaccuracies, contact the relevant reporting agency and ask them to correct it. Focus on paying down high balances and if payments have been delayed or late, get them back into order and totally paid up-to-date.

What about a credit score – how does this work?

Your credit score is a number shown on your credit report and is used by lenders to assess you financially before providing you with any type of finance. It would be great if all of the credit agencies used the same scoring method but they don’t, so you may end up with three different scores, all calculated differently.

Various things impact upon your credit score so if you want to keep it as pristine as possible, you should pay attention to your:

  1. Amounts of recent credit applied for (credit cards, loans)
  2. Credit utilisation ratios
  3. Information shown in public records such as bankruptcies or County Court Judgments
  4. Length of time you have been using credit
  5. Payment history
  6. Total balance across all debts
  7. Type of credit used

How can you avoid messing up your credit rating?

If you never take the time to check your credit score or don’t understand the way your report is compiled, it can be easy to make mistakes that will drag your credit rating down. Here are the key ones to look out for and avoid:

  1. Not knowing what you can afford – it is a good idea to calculate your debt-to-income ratio and not let is rise above 43%; this is the total of all of your monthly debts divided by your total income per month. If this gets too high, you may find yourself struggling to make payments.
  2. Not having a budget in place – it makes a great difference if you know you much you spend and receive each month. You can then decide whether or not to take on board more credit and even whether you can afford to save.
  3. Not shopping around for the best instalment loans – too often people jump at the first loan they see or are offered instead of looking for the best terms. Always do your homework and shop for the best deal; comparison sites are great for doing this so that you can compare fees, any service charges and interest rates.
  4. Not doing enough to prevent yourself being affected by fraud – never be complacent about this. Check your statements each month and frequently look at your credit report. Keep credit cards safely and not with details of your pin numbers. Shred statements and receipts and anything that shows your account number.
  5. Applying for too many credit cards or loans in a short time – taking on too much debt in a short time will be seen as a sign that you are using more credit than you can deal with or pay. If this bumps up your balance-to-limit ratio and the number of ‘hard’ enquiries made upon your file, your credit score will be impacted upon negatively. Remember that each hard search shows, whether or not you are successful.
  6. So as you can see, credit can be a great tool if utilised carefully, thoughtfully and after carrying out sufficient research. Most of all, once you understand how it works you can ensure that not only are you using credit correctly but that your good credit rating is preserved by paying on time and in full each month.
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