We recently talked about the benefits of a PCP (Personal Contract Purchase/Personal Contract Plan) agreement, with the PCP being a loan that helps you to buy a car without needing to pay off the full value of the vehicle beyond the end of the contract, since you won’t have full ownership after the agreement ends. However, a PCP does have its downsides, and here we will list some of the major negatives.
Beyond the regular monthly payments, there can be some hidden charges to a PCP that drivers may not necessarily be aware of. This includes the amount that you would have to pay in the event of an accident (with such costs having risen significantly in recent years due to the worryingly-increasing number of road accidents), as well as the amount of debt that can be incurred due to the reduced value of the car over the course of the agreement, which can leave you in negative equity. This also does not include insurance costs, which can vary depending on your driving experience, the condition of the vehicle, and also the terms of the PCP agreement as a whole.
Then we come to the balloon payment. For those who may not be aware, a balloon payment is the final payment when you come to the very end of a PCP (this also arises when you are about to complete the contract for a Lease Purchase). You do have the option to either pay for it and fully own the car, or hand the vehicle back (meaning no extra payment, but you no longer have a car), or to part-exchange the car and use any remaining equity towards the deposit for a new motor. Either way, it’s easy to assume that when you’re at the end of the agreement, you just make one regular payment and you’re done, but the balloon payment gives you a major decision to make, and really there is no way to avoid it, no way to ask for more time; you need to know what you will do long before that time comes, and it can be costly if you’re not prepared. So, it’s worth being mindful and aware of the balloon payment.
Now, if you do decide to part-exchange the vehicle and use the equity that is left for a new car, a fresh PCP agreement begins on a different model. But if this is something that you will continuously do, then you are at risk of what has been described as being locked into a cycle. In other words, you never really stop paying for a car under a PCP deal; you’ll never have a break between vehicles, because you’re potentially missing out on saving money in a new PCP if you do take a pause, and you’ll never fully pay off a car to the point where you can still drive around with only the insurance costs to handle. Hence why people believe they are locked into a cycle, because it never stops and though you’ll always have a car, you’ll never have a moment when you think “I’ve finally completed payments”, because you’re moving right on to the next car and, consequently, the next PCP agreement.