PCPs explained

Don’t be blinded with science

If your company car tax bill is astronomical you may decide the best way forward is to opt out of your company car scheme and take up the offer of a company car allowance to make some savings.

So, you might consider that the best and simplest way of getting trouble-free motoring is to buy a new car on a Personal Contract Purchase. It could be uncharted territory for you and it'll mean a trip to the dealership.

Once you have settled on the car that you want there'll be the issue of finance being discussed and before you know it you have been smooth-talked into taking a PCP that sounds wonderful. When you start looking at the details, however, you realise you're now stuck with an outrageously large interest rate for the next three years.

So, you need to be forearmed and forewarned before you even consider taking out a personal contract plan. Not all PCPs are bad news though and there's every chance you can secure a deal that won't break the bank.

Choices, choices, choices

A PCP is an arrangement where, once you have agreed a purchase price for your new car with the dealer, the finance company buys the vehicle on your behalf and you effectively rent it for the duration of the term.

You’ll probably pay on a monthly basis for an agreed period (most PCPs last between 18 to 42 months) where at the end you’ll have to pay what is known as a ‘balloon payment’ in order to secure full ownership of the car.

Most PCPs will give you an option at the end of the term: you can hand the car back, part exchange the car for another car on a similar deal, or make the final payment.

Go the distance
Some PCPs have mileage limitations and stipulations about the condition of the car at the end of the agreement. If the car is worth less than your designated 'bubble' amount at the end of the agreed period, you won't have any extra money to put towards another car.

This doesn't matter if you're just walking away and handing back the keys, but if you were intending on buying another new model then requesting a high 'bubble' may mean you have no deposit for your next car.

You have to consider the mileage restrictions and don't underestimate because it could prove costly. Make sure that the annual mileage restrictions are realistic because if you do go over you’ll pay extra. Even if the penalty is just 2p a mile, that’s an extra couple of hundred pounds if you have covered an extra 10,000 miles.

You can also have the servicing bills included as part of the deal, which makes life simpler. This is usually very attractive to former company car drivers who want to cut down the hassle of owning their own car.

You may also be charged if you don't keep the car in good condition. Remember, even if you hand the car back, the supplier will still have to sell it on.

PCP versus HP
Do not confuse a PCP with a hire purchase scheme where you make a series of equal monthly payments until the term is finished. This arrangement means higher monthly payments but you don’t have to pay the balloon payment at the end.

Because you are deferring the payment at the end of the PCP, hire purchase schemes tend to be cheaper in terms of the amount of interest paid but PCP providers are more likely to have negotiated decent deals with their suppliers and you could well get a better discount on the car you are buying. It is a balancing act and make sure that you work out the total amount you'll pay, and not just the interest rate, if you are torn between the two arrangements.

This is not a PCH
An easy mistake to make is to confuse a PCP with Personal Contract Hire (PCH) plans that are only available for businesses. The PCH is scheme where you just lease the car and there’s no prospect of ownership. These deals really represent hassle-free motoring and they are attractive to small businesses that will get 100% of the VAT on each monthly payment back if the car is only used for business, and 50% if the car is used for commuting to and from work and private mileage.

Parker's Top Tip

You can research the cars you are interested in by reading the full Parkers car review. You can also work out exactly how much you'll pay on company car tax using our company car tax calculator guide.