Research shows that only 20 percent of people with a Personal Contract Purchase (PCP) deal actually go on to buy the car. Which means the vast majority either walk away at the end of the contract or decide to use the car as a trade-in against a new model.
In fact, getting a new car is the most common option for people at the end of a PCP deal. So how do you ensure that you get the best possible price for your trade-in vehicle? Read on to find out.
Beware the ‘minimum’ in GMFV
There are three parts to a PCP deal: the deposit, the monthly repayments and the final payment, which is often referred to as a ‘balloon’ payment.
The final payment is set by the finance company estimating what the car will be worth at the end of the contract. This is called the Guaranteed Minimum Future Value (GMFV) and it’s your first indication of what the car will be worth as a trade-in.
But it’s not set in stone, because a number of variables will dictate the final valuation.
Note the use of the word ‘minimum’. If the car drops in value, you’ll be protected against a potential loss – the finance company will take the hit. But it’s your responsibility to maintain the car to the terms set out in your PCP contract.
Failure to do so could mean that the price you get for the car drops below the ‘minimum’ agreed value.
Your first potential pitfall is the mileage limit you agreed to at the start of the PCP contract. Dealers tempt punters with low monthly payments based on strict mileage restrictions, so make sure you set a realistic limit.
A finance company will charge anything from 3p to 30p for every mileage you are over, so a few thousand miles could cost you a few hundred pounds. You have been warned.
If you think you’ll go over the mileage limit, it’s far better to negotiate a new deal before the contract than to wait until the end, as the penalty is likely to exceed that of a higher mileage cap.
Read the small print of your PCP contract and you may notice financial penalties for minor damage to the car. Remember, you don’t own the car unless you make the final payment, so the finance company expects you to take care of the vehicle on its behalf.
If the car requires light work to make it ready for sale, you’ll be expected to stump up the cash. This could include damage to the paintwork, kerbed alloy wheels and stains on the upholstery.
Wear and tear is fine – you don’t have to live with a concours-winning car – but anything beyond that could cost you dear.
It’s in your interest to maintain the car to the highest standards, because the difference between the final payment and the car’s value can be used to reduce the deposit on the next car.
You’re required to maintain the vehicle to the manufacturer’s service schedule at the correct franchise dealership. Failure to do so will cost you hundreds, possibly thousands, of pounds at the end of the contract.
These points apply even if you decide to have the car back at the end of the PCP deal, so if you’re not comfortable with any of them, you might want to consider another form of financing your car.
For example, a personal loan means that you’re free from mileage and servicing restrictions, but at the mercy of potential depreciation disasters.