Personal Contract Pricing, or PCP, provides greater benefits in financing a car purchase. The loan option turns out to be a better deal as compared to leasing and conventional auto loans. One ways you can lower the loan burden is by spreading the loan amount over a longer period of time. But, it also inflates the net loan amount – unless the loan has zero-percent APR.
For instance, if you’ve availed a 3-year car loan of £25,000 at 2.5% APR, then you will have to pay £722 per month. In case of a 2-year car loan, the monthly payment amounts to £1,069 per month. Clearly the higher period car loan has lower monthly payment.
However, with a higher period auto loan the net payment is higher as compared to a lower payment period i.e. £25,992 for 3-year loan and £25,656 for a 2-year loan.
So, a two-year PCP deal generally provides greater value as compared to a three-year period loan. By artificially reducing the monthly payments through extending the payment period, you inflate the net amount that you pay for the vehicle. This defeats the very reason for which you opt for a higher period loan.
Why a two-year PCP deal is Better than a three-year deal?
The PCP deal allows you to own a car by making monthly payments. At the end of the payment period, you can either purchase the vehicle by making a ‘balloon payment’, sell the car back to the finance company, or trade the vehicle for a new one. The last of these is where a two-year PCP deals offer greater value as compared to the typical three-year period deal.
To understand the reason why a two-year deal provides greater value, you should know that every car that is purchased using a PCP option has a guaranteed future value (GFV). This value is calculated and quoted by the company that issues PCP. A car will have great GFV at the end of a two-year period as compared to a three-year period. This means that if you trade-in the car after the end of a two year period, you will have greater a equity for initiating a new PCP deal as compared to initiating the deal after a three year period.
In addition, some car brands provide 0% APR on two-year PCPs, but not on a three- year schemes. In such a case the lower period plan will entail lower monthly payment and greater GFV with inflating the net payment made for the car.
In addition, some car manufacturers charge higher rate on the longer period PCP, and a lower rate on shorter period plan. This again makes a shorter period two-year plan a better option as compared to the usual three-year PCP plan.
In short, you would benefit more from opting for a two-year PCP. The GFV of the car will typically be higher at the end of two years, while the monthly amount is lower making it a better deal as compared to the alternative three-year scheme.