A new car is the second most expensive purchase, after a home, that many people will make in their lives, and with the cost of motoring on the increase, it’s important that careful consideration is given to choosing the right finance option. If you are looking to buy a car you have probably heard of PCP (Personal Contract Purchase) as it is the fastest growing finance product, but what is PCP?

A PCP agreement requires the customer to make fixed monthly payments, normally over 3-4 years, which are calculated based on the vehicle’s expected depreciation (The difference between the purchase price and the resale value at the end of the agreement, taking into account age and expected mileage).

The beauty of PCP is the better a car holds its value, the lower the monthly payments will be, allowing consumers to drive a new (or newer) and often prestigious vehicle at a much lower price than a traditional hire purchase agreement.

At the end of the car finance agreement the consumer is left with a lump sum known as the guaranteed minimum future value (GMFV). The consumer is then presented with 3 options on how they would like to proceed. The first option available is to pay the lump sum off also known as a balloon payment and keep the car, the second option is to give the car back without making any further payments, or the third option is to part-exchange the vehicle for a new one.

Personal Contract Purchase not only seems to be the most talked about finance product on the market but also appears to be the most popular choice for many motorists wanting to finance their vehicle. So why is this?

PCP is becoming increasingly popular with the general public for a variety of reasons. The first advantage is that the rate of interest is usually lower than a loan purchase or a personal loan, resulting in consumers paying less. In addition to this, the monthly payments are generally lower, giving consumer’s access to more prestigious vehicles that may previously have been out of their price range.

According to a poll by motoring.co.uk nearly half of drivers (44 per cent) plan to buy a new car next year. This is an increase on last year, when 38 per cent said they expected to change their car in 2013. This shift in the car industry is possibly due to the vast amount of consumers that are money-conscious, therefore jumping at the sound of lower monthly payments. As a fixed price is agreed the consumer knows exactly what they have to pay each month, which in turn helps to manage their finances, and the flexibility of PCP allows for drivers to change their vehicle every two to three years giving them access to more ‘upmarket’ vehicles.

Our data here at Creditplus shows that whilst the car industry is changing so is buying behaviour. 2013 has seen an increase in the number of prestige cars brought on finance, with the Audi A3 and the Range Rover Sport making an appearance in the top 10 most financed cars of 2013.

It is hardly surprising to see the shift towards cars such as the above as these brands hold their market value and have a smaller depreciation cost when compared with other brands, so these vehicles suddenly become attainable if purchased using a PCP finance agreement.

So for once the consumer is really getting more than they thought possible and as a result are driving more expensive cars than they could afford to buy outright. The only other decision that has to be made is whether to keep the vehicle or hand it back at the end of the finance agreement.