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PCP Finance & GAP

Introduction - What is Personal Contract Purchase (PCP Finance)?

Buying a car using a Personal Contract Purchase (PCP) is currently one of the most popular ways of buying a car in the UK. This type of motor finance is often heavily promoted by motor manufacturers and dealerships.

Amongst the key advantages, you have the flexibility of swapping the car earlier than expected, or if you would like to keep the vehicle you can simply pay the final option to own figure.

Key features of PCP or Personal Contract Purchase motor finance

  • You pay a deposit (this can be cash, equity from a part exchange or a Finance Deposit Allowance from the motor finance company or manufacturer
  • You make fixed monthly payments over a set period of time (usually between 2 and 4 years)
  • You have three options at the end of the agreement.
  1. Trade in the vehicle, any equity can be used for a deposit from your next vehicle
  2. You can buy the vehicle for the fixed Guaranteed Future Value (GFV) set out in your original agreement
  3. You can hand the car back and walk away

PCP Finance is similar to a Hire Purchase agreement in that you do not own the vehicle until you make the final payment, but you do retain termination and repossession rights.

The key difference between PCP and Hire Purchase is that PCP's tend to be over a shorter term, with a deferred final payment. This can allow for shorter buying cycles, and keep you in a relatively new vehicle should you choose to swap in at the end.

List of Manufacturers PCP Names

Total Loss Gap Insurance for PCP

  1. Volkswagen - PCP Solutions
  2. Toyota - Access
  3. Citroen - Elect 3
  4. BMW - Select
  5. Mercedes Benz - Agility
  6. Ford - Options
  7. Nissan - Preferences
  8. Vauxhall - Flexible
  9. Renault - Selections

You will see from the meanings of the different names above, the most common theme is choice. Because you have the choice of swapping the vehicle in slightly early or paying the final balloon payment and keeping the car, manufacturers play on the fact that it is flexible and you have the ability to select, choose or 'elect' a different option that suits you.

Therefore, no matter what the agreement is called, as long you pay a monthly payment and at the end have the legal option to own the vehicle by paying a final lump sum, this will be what we call a Personal Contract Purchase (PCP).

Why would you need GAP Insurance with a PCP?

The consideration for a GAP Insurance product with PCP Finance is really no different than it would be with hire purchase, other finance agreements, or if you owned the vehicle outright. Over time the vehicle loses value. If the vehicle is then 'written off' following a theft, fire, accident, or flood then you are left with a few financial issues:

  • If you have finance outstanding on a PCP then the settlement may be higher than the amount your motor insurer values the vehicle at. This shortfall you would have to bridge just to pay off the finance.
  • You have to replace the car. Your motor insurer may only provide the market value at the time you claim. This can leave you woefully short of the amount you need to replace the vehicle with an equivalent one (of the same age and mileage yours was on the day you bought it).

Your Gap Insurance claim would still be handled in the exact same way and is no different to a normal hire purchase agreement, for example. 

Your own insurance company will write to you and offer you a settlement figure, which is based on the current value of your vehicle at that time.

Depending on which type of Gap Insurance you have purchased, your GAP policy would then take you from your motor insurance settlement figure back up to either:

  • The amount outstanding on finance (Finance & Contract Hire Gap)
  • The original invoice price you have paid for the vehicle (Combined Return to Invoice)
  • The cost to replace the vehicle with another 'like for like' (Combined Vehicle Replacement)

If you are considering a Total Loss Combined Return to Invoice & Vehicle Replacement Gap Insurance, please remember that we combine all three types into one all-inclusive comprehensive policy and pay you, whichever figure is the highest.

Example of how PCP Finance works with Total Loss GAP

The PCP Finance agreement

You buy a brand new car in 2020 for £20,000

You take it on a PCP finance package for 3 years, with £5,000 deposit, 36 monthly payments of £295

You set the annual mileage allowance at 10,000 miles a year.

The Guaranteed Future Value (GFV) is £7,000

The APR for this agreement is 7.7%

2 years later.......

The vehicle is stolen. The Motor Insurer declares the vehicle a loss and values it at £10,000

The finance settlement is £11,000

The cost of the equivalent new vehicle is now £22,000

How Total Loss Gap Invoice & Replacement GAP Insurance works with the PCP

We will look to cover the difference between your motor insurers settlement (£10,000 in this case) and the higher of:

  • The outstanding finance settlement (£11,000 in this case)
  • The original invoice price you paid (£20,000)
  • The cost of the equivalent vehicle, as yours was new when you bought it (£22,000)

In this example, the highest of the three figures is £22,000 (the cost of the new vehicle). This means that you will get £10,000 from the motor insurer plus another £12,000 from the Total Loss Gap Invoice & Replacement GAP. This gives you £22,000 in total.

As you still have £11,000 outstanding on your finance for the original vehicle you would need to pay that off from your £22,000 total. This would leave you with £11,000 to use towards a new vehicle.

PCP & Gap Insurance