Understanding PCP Finance

Hey Folks,

Matthew Caffrey here from Gerry Caffrey Motors. A warm welcome to the first edition of my weekly newsletter.

In my opinion, the automotive industry is often guilty of using complex jargon that can feel overwhelming to customers. With this newsletter, my goal is to clear the fog surrounding these terms and make the industry as transparent as possible.

So let’s start with the most frequent qustion I get asked, how does PCP finance work?

Exploring PCP Finance: A Beginner's Guide

Personal Contract Purchase (PCP) is a financing option that provides flexibility and can be customized to suit your needs. In this example, we will use a hypothetical customer named John to demonstrate how PCP works, so you can make informed decisions about financing your car.

Imagine John walking into the showroom and considering a Suzuki S-Cross priced at 35,000 euros. John is interested in financing the car through PCP but is not completely sure about how the deal works. Below is a step-by-step guide to how John's deal will be structured.

1) Laying the Foundation: The Deposit Explained

To qualify for the deal, John needs to put down a 20% deposit. For a car costing €35,000, that's €7,000, which can be paid in cash or the equivalent value of a trade-in. If John's trade-in exceeds this amount, we can discuss either using the surplus for a larger deposit or returning the difference to him.

2) Mapping Your Monthly Expenses: The Payment Plan

Next, John will cover 40% of the car's price through monthly installments. John is buying a Suzuki, so he benefits from an interest-free loan (very clever, John). The calculation for his monthly payments is based on 40% of €35,000, divided over 36 months. This means that John will be paying €388.89 per month, let's call it €389 per month.

3) Approaching the Horizon: Understanding the End of Term Options and GMFV

This is where the confusion starts for most people, so let’s go through the options at the end of a PCP agreement.

John is nearing the end of his three-year journey with his Suzuki car. On the 37th month of his contract, the final payment becomes due, also known as the Guaranteed Minimum Future Value (GMFV). This term is important because it means that Suzuki guarantees that John's car will be worth at least the specified GMFV at the end of the PCP term. Regardless of economic conditions, the car will be valued at this rate. Provided the car meets the agreed mileage and condition, John can choose to walk away from the deal without making any additional payment.

John's GMFV on the Vitara is set at 40%, so his balance is €14,000 due on the 37th month of his contract.

However, John has other options to keep the car or trade it in if he prefers. Usually, when a GMFV is set to 40%, there will be significant equity left in the car after the deal. Research shows that, on average, new cars depreciate by 30-40% over a 3-year time horizon. If the value of John's car depreciated by 40% over 3 years, his €35,000 car that he bought in 2024 would be worth €21,000 in 3 years' time.

John decides that since he has €7,000 of equity in his car, he is not going to just hand it back to the dealership and walk away from the GMFV. He now has 3 options. He can 1) Trade the car back into the dealership he bought from or another dealership that has offered him a price he is satisfied with and use the remaining equity to cover a deposit on a new car. 2) He can pay off the GMFV and keep the car. 3) He can refinance the GMFV over a further 2-3 years and hold onto the car.

John decides that he likes having a new car and being under full warranty, so he decides to take the option to trade the car back in and begins a new PCP deal on a 2027 model Suzuki. He signs a new contract, and the cycle begins again.

Will PCP work for me?

If the below appeals to you, PCP will likely be a good fit for you:

1. Lower monthly repayments - Monthly repayments are lower than traditional Hire Purchase because of the GMFV.
2. Flexibility at the end of your contract - You get to choose what action to take on the GMFV towards the end of your contract; you don't have to decide now.
3. You like changing cars regularly - If you enjoy changing your car every few years to benefit from the latest models and technology, PCP finance allows you to do so without the hassle of selling your old car.
4. A fixed monthly budget for your car expenses - PCP offers a clear understanding of your budget as you will be under warranty for the duration of your contract, so you won't face unexpected expenses over the 3-year period.
5. You drive under 25,000 KM per year - Due to mileage parameters we will outline below, PCP is not particularly suited to those doing very high mileage.

If the below are concerns for you, PCP may not be a good fit for you:

1. High Mileage Drivers: In a PCP agreement, you agree to an annual mileage limit, usually between 15,000-25,000 KM. If you exceed the total mileage limit over the 3-year period and decide to hand back the keys, Suzuki currently charges 8 cents per KM over the limit. If you choose to trade the car back in, there is no penalty, but higher mileage causes steeper depreciation, which will affect your trade-in valuation. If you refinance the GMFV or pay outright, the mileage limit and associated excess mileage charges do not come into play.
2. Concerns over the condition you keep your vehicle in: If you're likely to cause a great deal of wear on your car due to your driving or what you use the car for on a day-to-day basis, PCP might not be the best fit for you. If you return the car in very poor condition, you could incur excessive wear and tear penalties. Similar to high mileage, poor maintenance of your vehicle causes steeper depreciation, which will affect your trade-in valuation if you wish to part exchange your car.

Conclusion

PCP finance can be an excellent fit for many customers, offering flexibility and manageable payment options that cater to a wide range of needs and preferences. However, like any financial decision, it's crucial to approach PCP with a well-informed mindset. We strongly advise seeking proper guidance, thoroughly reading through all the terms and conditions, and considering your financial situation and future plans. By doing so, you can ensure that your choice not only meets your immediate desires but also aligns with your long-term financial health and automotive goals. Remember, the right decision is one that's made with clarity and confidence.

That's all until next week, thanks for reading!

Matthew