Personal contract purchase

A PCP may include the element of maintenance during the duration of the contract though this is in the minority of cases. In the UK, the majority of PCP deals include the payment of the first year's vehicle tax,[3] but subsequent renewals will be at the customer's expense.

The final payment, which initiates the actual transfer of ownership, is calculated by the financing company at the start of the agreement based on its estimates of the future residual value of the vehicle (Guaranteed Minimum Future Value, or GMFV). This final payment is called the balloon payment,[4] and is usually taken as a direct debit unless the customer takes an alternative course of action prior to this time.

It may be agreed instead that the final balloon payment is compulsory within the terms of the contract, but that the owner then retains a right to hand the vehicle back to the financing company at the previously agreed figure (GMFV) in lieu of the balloon payment.[5] It is necessary to fully understand these aspects of a personal contract purchase before signing any deal as a loss may be incurred at this point. This option, but not the obligation, to acquire the car after a period equivalent to a contract hire is therefore packaged as either an option (in law) to purchase the car (a call option) at a 'set' price, or a right to sell the car (a 'put' option) at a set price after ownership is fully achieved from the final ‘balloon’ payment.

The monthly payment amount is determined by the amount of the initial payment (the ‘deposit’), which can be negotiated with the financing company, and the final balloon payment, which is set by the financing company. The financing company is likely to be represented in this discussion by either a car dealer or automotive finance broker.[6]

This form of contract purchase was originally used more by businesses than individuals, but there has been steadily increasing use by consumers in countries such as the UK in recent years. In 2016, 82% of personal new car finance deals in the UK were PCPs.[7]

There is a Finance & Leasing Association Arbitration Scheme in the UK, used if there is a subsequent dispute.[8]

VAT is applicable on the entire vehicle price and is capitalised into the monthly payment when calculating the PCP monthly payment.

Unlike Personal Contract Hire, the leasing company can reclaim the VAT, and this means that the monthly payment would be less because:

• the interest charges are applied to the net of VAT cost price i.e. a car would be without the VAT, giving substantial savings on interest charges
• the depreciation on the car is based on the net of VAT cost price, immediately saving the customer a significant amount of depreciation.

In a personal contract hire, the lessee pays VAT on the monthly payment.

PCP car sales have come under heavy scrutiny in Ireland since 2014 as customers felt not enough effort was made to ensure they had full knowledge of all details within the PCP agreement.[9]

The Society of the Irish Motor Industry (SIMI) commissioned a report on PCPs, carried out by Grant Thornton, in an attempt to benchmark PCPs.

In July 2017, the Competition and Consumer Protection Commission (CCPC) commenced a study into PCP car finance market.[10] This followed a study by Motorcheck which revealed Ireland's new vehicle market was heavily dependent on PCP agreements. The study found 73,979 new vehicles were sold on finance in Ireland in 2016, a 139% increase from 2014.[11]