Is it worth buying a car at the end of PCP?

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If you’re thinking of buying a new car, one option you may be considering is what’s known as Personal Contract Purchase, or PCP for short. A whopping 74% of new cars are purchased this way according to the Finance & Leasing Association, and it’s fair to say that its popularity has grown exponentially in recent years. Despite the name, you’re not obliged to buy the car at the end of your contract period, and so you’ll face a big decision: buy or return? Here are some things to think about when deciding.

Understanding PCP and its end-of-term options 

What is PCP?

Personal Contract Purchase, or PCP, is a form of car leasing that allows you to spread the cost of buying a car over several years, with no obligation to purchase the car at the end of the term. You put down an initial non-refundable deposit, and then you make fixed monthly payments for the duration of your contract. Most PCP contracts are between two and four years long, and the size of the deposit you put down influences the amount you then pay each month.

End-of-term choices

When your PCP contract comes to an end, you have three options:

1. Buy the car outright by making what’s known as a ‘balloon payment’
2. Return it and have no further responsibility or payments (unless there are excess mileage or damage fees to pay)
3. Part-exchange it and enjoy the benefits of upgrading to a newer model of the car

Here are some of the benefits and drawbacks to choosing the first of these options.

Pros and cons of buying a car at the end of PCP 

Benefits of buying

When you’ve become used to paying monthly for your car on a PCP contract, buying the car outright at the end of the contract means you’ll no longer have to budget for these monthly payments. That’s if you don’t refinance it, which is of course another option.

You’ll become the legal owner of the car and can do what you want with it (you won’t be able to modify it in any way while you’re still in contract) – including having all mileage limits lifted. If you’ve become attached to the car, you’ll also have the enjoyment of knowing that it’s now yours and here to stay.

There are potential financial benefits, too. When you take out a PCP contract, the dealer will give you a Guaranteed Future Value (GFV) and this will be what you’ll pay as the ‘balloon payment’ if you want to buy the car. The GFV guarantees what the car will be worth at the end of your contract, regardless of whether it’s worth more or less than that. This means that when you buy the car at the end of your contract, you can end up ‘up on the deal’ if the actual market value of the car is more than the GFV.

For example, your GFV might be £5,000 based on having done 2,000 miles a year for the four years of your contract. You only ended up doing 1,000 miles a year, meaning that your car has fewer miles on the clock than forecast and is therefore actually still worth more like £6,000. Because the price you pay is the GFV, you effectively underpay for the car when you buy it outright – and should you then choose to sell it for its actual market value, you’d be £1,000 better off.

Drawbacks of buying

The flip side of the GFV is that you can also end up overpaying if the car has depreciated more than anticipated – for example, if you’ve exceeded the mileage limit agreed in your contract and put more miles on the clock. Let’s say your GFV was £5,000 based on doing 2,000 miles a year for the four years of your contract, but you ended up driving 3,000 miles a year. This means that the car is only worth £4,000, but you’ll still have to buy it for £5,000 – so you’ll effectively lose £1,000. This won’t represent a good investment and it’s worth exploring alternative options.

You’ll also have to factor in the other (often unpredictable) costs associated with cars as they get older, such as higher maintenance, servicing and insurance expenses, which you’ll need to budget for if you keep the car.

Alternatives to buying the car

If it’s looking likely that the market value of the car will be less than the balloon payment, or if you don’t have the funds to buy the car outright but still need a car, you have a couple more options. The first is to trade the car in for a new one and sign up for a new PCP agreement, and the second is to try another form of car ‘usership’. A car subscription is a great alternative to car ownership, giving you the benefit of fixed, easy-to-budget monthly payments with none of the upfront expenditure or ongoing running costs to worry about. Insurance, maintenance, breakdown cover, tax and all your other costs are taken care of in the monthly payments, which you can cancel at any time, giving you a much greater degree of flexibility as well. If this sounds as though it could be a good option for you, find out more about how car subscriptions compare with PCP.

Making the decision: is buying your PCP car right for you?

Ultimately, the decision over whether to go ahead with buying the car when your PCP comes to an end will come down to your circumstances and financial stability, along with whether your car needs and financial situation are likely to change in the future. As well as gauging whether you’re likely to make or lose money by buying the car, you should also consider market trends that could affect the value of the car, such as demand for particular makes and models.

If you’re unsure of the best way forward for you, you can always have a chat with our Drive Fuze experts to get advice on the best solution for your circumstances. Check out our support pages to learn more, and browse our website to discover the cars you could be driving in as little as a week.