One of the most favorable low rate car loans, a personal contract purchase (PCP for short) is most commonly associated with leasing. Of your car loan options, a PCP is more or less a hire purchase loan because you do not own outright the vehicle you are making payments on until the final payment. Personal contract purchases are popular among borrowers with a good credit history because of their desirable car loan terms.
Essentially, a personal contract purchase is broken down into three parts. These are the down payment, the regular monthly payments and one large payment at the end of the contract known as the GFV–guaranteed future value. When you apply and are approved for a personal contract purchase, there is a distinct possibility that you will end up with a lower monthly car payment. This is because your monthly payments are a division of the depreciation of the vehicle rather than its full sticker price.
Here’s how it works: the car’s guaranteed future value is determined. This is the amount the car should be worth (and is guaranteed by the lender to be worth) provided you do not exceed the mileage limit nor put excessive wear and tear on the vehicle. Naturally, this figure is higher for top-of-the-line vehicles. However much you put down as a deposit is added to the GFV. That total is then subtracted from the sticker price of the vehicle. Thus, if you put down $8,000 on a $40,000 car that has a GFV of $17,000, the formula looks like this:
40,000 – (8,000 + 17,000) = 15,000
$15,000 is the value of the depreciation of the car, and that is what your monthly payments consist of, plus interest. At the end of the contract, you can either pay off the GFV and own the car or return it to the lot.
To find the best rate on a PCP, start off by accessing your own credit score. Any lender will check this, so don’t go into the loan process without knowing where you stand. Try to avoid financing through the dealership if at all possible. Dealers almost always mark up the interest rate to show an amount of profit for themselves. If you can get a personal contract purchase loan from a bank, credit union or other third party lender, you will likely receive a lower interest rate. Getting pre-approved is a good way to be a leg up on the car salesperson. You will already have the loan secured, so you can casually shop for the right car without feeling pressured by the dealer.
As with any car loan, you should shop around. Don’t expect that the first quote you receive is the most favorable. If you do some comparison shopping, you’ll be in a better position to find a personal contract purchase with the best terms possible. If you can afford it, use your personal contract purchase loan to get into a high-end car. Not only will you end up driving a stylish vehicle, but its guaranteed future value will automatically be higher.