• What are Personal Contract Purchase Auto Loans?

    Personal contract purchase and hire purchase are two car loan options for those who either don’t want the full cost of ownership of a vehicle, or for some reason can’t obtain car loan finance for a traditional purchase. Both of these are types of contracts where the “buyer” isn’t the legal owner of the vehicle. The car loan terms are that the vehicle is “rented” for a specific length of time and then the buyer has the option of making a balloon payment to obtain a title to the vehicle, or turning it back in to the dealer. One benefit of a hire purchase loan or personal contract purchase is that the payments will be significantly less than if the vehicle had been bought outright.

    Personal Contract Purchase

    A personal contract purchase is a type of auto loan most commonly associated with car leasing. It is a favorable type of auto lease loan that has three basic components: down payment, monthly payment and optional final payment known as the guaranteed future value. A PCP is a good option when leasing a higher end vehicle often times. The required down payment is not particularly high, monthly payments cover the cost of the depreciated value of the car and you have the option of paying a lump sum and purchasing the car or returning it to the lot when the contract expires.

    When you lease a car with a PCP, you first receive a purchase quote. This is the cash price of the car. Whatever amount you put down is added to the calculated GFV of the automobile and subtracted from the cash price. The GFV will be higher for a higher end car like an Audi than it will for a Toyota Camry, for example. Your monthly payment is based upon the difference between the cash price and the summed GFV and deposit plus interest.

    To use a numerical example, say the car costs $25,000 and you put down a $5,000 deposit. After mileage limitations and certain amounts of wear and tear is considered, pretend the lender determines that the GFV of the car should be $10,000. Thus, $25,000 minus $15,000 ($10,000 + $5,000) equals $10,000. Your monthly payments will be a division of that amount plus interest. You are only paying for the car’s depreciation. When the contract expires, you can pay the lump sum defined as the GFV or you can return the car.

    This type of contract is classed as a conditional sale agreement and offers specific protections by law. It is usually entered into by the buyer as a way of getting away from losing money on the vehicle over the length of the loan, known as depreciation. Most personal contract purchases only allow a deposit of up to 40 percent of the total value of the new vehicle to be made. This deposit and the new vehicle price are going to be the biggest factors in determining the monthly contract price, or lease payments.

    Hire Purchase

    Hire purchase loans are a type of contract where the seller and the owner are the same throughout the length of the contract. With a hire purchase, the buyer has certain rights not present in a personal contract purchase.

    You have the ability to enjoy “quiet possession” of the vehicle. This means that nobody will interfere with possession of said vehicle during the length of the contract. Also, you have the right to purchase the vehicle outright at any time by paying the balance of the agreed upon purchase price.

    You can return the vehicle at any time to the dealer, usually with a penalty to be paid to the dealer for profit loss. This penalty is limited by law in most states. Additionally, you can transfer the contract to a third party, with consent of the owner or dealer. As long as the third party meets credit requirements, the dealer can’t unreasonably refuse.

    Personal contract purchase and hire purchase contracts are quite similar in that the seller usually retains ownership in the vehicle. The payments are kept low and there is a balloon-type payment at the end of the contract however in a hire purchase contract, the buyer has certain extra rights which make this type of contract more palatable.