Personal Contract Purchase (PCP) deals typically last for 3 or 4 years and are built around 3 sections:

1. The deposit
2. The monthly repayments
3. The optional final payment

The deposit and monthly repayments are designed to pay off the vehicle's depreciation; not the car itself. At the start of any PCP agreement, the amount the car is expected to depreciate is calculated to give a Guaranteed Minimum Future Value (GMFV)

The GMFV becomes the optional balloon payment which is due at the end of the 3 or 4 year agreement. When you reach this stage, you have 3 options:

1. Pay the balloon, and own the car outright.
2. Don’t pay the balloon, and the car reverts back to the dealer and/or the manufacturer’s finance company.
3. Use accrued ‘equity’ to go towards a new car

The GMFV is a predicted valuation of your car; in simple terms it is what your car will possibly be worth after the duration of the agreement and based on the mileage allowance set out in the beginning. 

As this is just a predicted valuation, it is not always accurate, and in some cases you may find that the monthly repayments you have made add up to a greater amount than the car has actually depreciated.

This means you have overpaid and is referred to as accrued equity. You can use this equity towards a new car.

• The deposit amount can be flexible
• Monthly repayments are usually lower than a Hire Purchase or Personal Loan
• You can pay off a PCP agreement early
• You can own the vehicle at the end of the agreement if you choose to pay the optional final payment
• PCP agreements sometimes bring discounts and additional benefits from new car manufacturers that are not available on people buying cars outright or using HP agreements
• You don't need to worry about depreciation, as this is all considered in the agreement itself