Many car dealers offer Personal Contract Plans (PCPs) as a way to pay for a car. PCPs can appear very attractive because they usually have low monthly repayments. You also have the convenience of being able to sort out your finance and pick your car in the same place. However, PCPs are very complex compared to other types of car finance and it’s important to understand all the terms and conditions before you sign up.

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A PCP can be broken down into three parts:

• The deposit • The monthly repayments

• The final lump-sum payment which is called the Guaranteed Minimum Future Value (GMFV)

• The deposit: This is typically between 10% and 30% of the value of the car. Your deposit can be paid in cash or, if you already own a car, you can trade it in as your deposit.

• Monthly repayments: PCPs usually last for three years and they generally have low monthly repayments. This can make them seem more affordable compared to other forms of finance. The reason the monthly repayments are low is because you don’t pay for a large portion of the cost of the car until the end of the contract.

• GMFV (lump-sum payment): This large, final payment is how much it will cost you to own the car at the end of the contract. This figure is set at the beginning of the contract by the lender.

How flexible is a PCP?

These contracts are among the least flexible forms of finance. Because the repayments are fixed for the term of the contract, you usually can’t increase your repayments each month if you want to and if you want to extend the term, you may be charged a rescheduling fee.

PCP or personal loan? The main difference between a PCP and a personal loan is that with a personal loan you borrow the money, pay for your car, and own it immediately. With a PCP you don’t own the car, you are essentially hiring it for an agreed period of time, typically three years. You only own it if you pay the GMFV. This is important because if you were to run into financial difficulty during the term of your contract you wouldn’t be able to sell your car unless you had permission from the lender – as they are the legal owner of the car.

Will a PCP show up on my credit record?

Currently Hire Purchase contracts and Personal Contract Plans (PCPs) are not recorded on your Central Credit Register report or on your Irish Credit Bureau score. However, it’s intended that they will be included in the future.

Can I cancel my PCP before I finish my monthly repayments?

With a PCP you can end your contract and give back the car and pay half the PCP price – this is called the ‘half rule’. The half rule is part of the Consumer Credit Act 1995 and gives you the right to end a PCP agreement at any time. The half rule limits your liability (the amount you are responsible for) to half the PCP price of the car. The agreement from the finance company must show the figure for half the PCP price of the car. If you have paid less than half of the PCP price of the car, you can give the car back, and you will only owe the difference between what you have paid, and half of the PCP price of the car. You don’t have to pay half the PCP price to the lender before you end the agreement under the half rule. However, you will have to pay the difference between the payments you have made to date and half the PCP price. You will be responsible for the cost of any repairs that are necessary. If you have paid more than half of the PCP price of the car and have not missed any payments, you can end the agreement and hand back the car. You will be responsible for the cost of any repairs that are necessary. If you have paid more than half of the PCP price, you will not be entitled to any refund.

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Can my car be repossessed?

With a PCP, your car can be repossessed if the terms of the contract are broken, for example, by missing repayments. If you have paid less than one-third of the PCP price, the lender can take back your car without a court order. If you have paid more than one-third of the PCP price, the lender will need a court order to take back the car.

In addition, the car cannot be repossessed from your private property. For example, if the car is parked in your private driveway, it can’t be taken away, regardless of how much money you’ve paid back. If your car is repossessed, the lender will generally sell the car and the money goes towards the outstanding debt. But you will still be liable for the difference between what is owed and what the car is sold for. For example, if the car is sold for €5,000 and you owe €8,000, you will still have to pay back the €3,000. What happens at the end of my contract? At the end of your contract you can: • Pay the GMFV and own the car. Until you make this final payment you don’t own the car – the lender does. This means that for the duration of the contract, you are really only hiring the car. If you want to own the car, you will need to think about how you plan to pay for the GMFV long before your contract ends. Unless you’ve been saving for this lump-sum payment, it may mean having to take out a personal loan to pay for it. Alternatively, your lender may be willing to arrange finance, for example a Hire Purchase (HP) agreement to cover the GMFV when the PCP contract ends.

• Hand the car back. Be aware that if you hand the car back, while you generally don’t have to pay the car dealer anything more, you might have to pay a penalty if you haven’t met all the terms and conditions. For example, if you have exceeded any mileage limits or if there’s excessive ‘wear and tear’ on the car. There are also requirements about where and when you get your car serviced, so watch out for this.

• Enter into another PCP contract. The deposit you put down for your first car won’t be given back to you. If the market value of your car is greater than the GMFV then you may have some equity to put towards a deposit on a new car. For example, if the GMFV is €10,000 but the car is worth €12,000, you will have €2,000 to use as a deposit for your next car. The value of the car will depend on its condition.

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What happens if the car is worth less than the GMFV?

When the GMFV is set at the beginning of the contract it’s usually set at less than the expected value of the car at the end of the contract. The idea being that there will be some equity in the car at the end of your contract. But, if the value of second-hand cars has fallen by the end of your PCP, then you may not have any equity in the car at the end of the contract. And if your car is in bad condition, the value may be lower than you expect. If you have no equity to use as a deposit on your next car, you will need to fund it another way. Or, if you want to pay the GMFV and own the car, you might find you are paying more than the car is actually worth.

What happens if my actual mileage is higher than what was agreed?

At the end of your contract, if you want to return the car and walk away or enter into a new PCP contract, mileage becomes important. If you are giving the car back and you have exceeded the mileage agreement, you may have to pay a financial penalty. If you are entering into a PCP, and you’ve exceeded the mileage limit, this will affect the amount of equity you have. You’ll need to have a look at your contract terms and conditions so you know what you’re going to be charged if you exceed mileage limits. For a realistic estimate of your mileage, check your service records or you can work it out using your odometer. If during your contract you expect to exceed or find that you have actually exceeded the pre-agreed mileage limit, consider asking your car dealer to restructure your contract. You can restructure your contract by changing from a PCP to a Hire Purchase (HP) agreement or you can return the car early. By returning the car early you can enter into a new, more suitable agreement which has a higher mileage limit or no mileage limit at all. Forget all that PCP hassle.

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