Guide to Motorcycle PCP Finance
Personal Contract Purchase (PCP) is fast becoming the most popular way of buying a new bike. The attraction of PCP is that it means people can afford a more expensive bike with lower monthly payments than with traditional forms of finance. However, riders need to understand what they’re letting themselves in for if they want to avoid an unpleasant shock at the end of the agreement.
What Exactly Is PCP?
PCP is a type of finance agreement that came over from America and swept the car market about twenty years ago. In the last five years, it has rapidly gained popularity in the bke market and replaced traditional hire purchase as the preferred way of buying a new machine.
A hire purchase agreement is the same as a personal loan in that you borrow an amount of money, the bank/finance company add some interest on, and you pay back a certain amount per month for an agreed number of months. When the last monthly payment is made, the bike is yours. That’s not the case with PCP…
With a PCP agreement, you are paying the difference between the price of the bike (less your deposit/part exchange) and the anticipated value of the bike at the end of the agreement. This is known as the guaranteed minimum future value (GMFV).
Monthly payments are usually lower with PCP compared to hire purchase because they do not cover the whole cost of the bike.
Imaginary PCP example:
Price of bike £10,000
Balance: £4000 You pay repayments on the £4000 balance for a set period of time e.g. three years.
Just to keep things simple, let’s imagine it’s an interest free deal. You would pay £111.11 per month x 36 months. At the end, you still owe £4000. The bike is guaranteed to be worth at least that (GMFV).
Something to remember is that the finance company expects the bike to be kept in good condition and that you do not exceed an agreed annual mileage. The reason for this is that a bike with higher mileage/poor condition is worth less than one with lower mileage in good condition.
If it was a traditional hire purchase deal (same bike, same deposit, same period) the monthly payments would be £222.22. At the end, you owe nothing. The bike is yours.
In reality, you’ll almost certainly be paying some interest but that doesn’t affect the way the agreement works.
With PCP, you are effectively paying for the bike’s depreciation + some interest.
PCP deals usually to run for between two and four years, with three-year deals being the norm. At the end of the contract you have three options:
- Hand the bike back and walk away
- Pay the balloon payment at the end and keep the bike
- Trade the bike in for a new one. If the bike is worth more than the GMFV, use that amount as your deposit.
PCP - Advantages:
- Lower monthly payments than hire purchase/bank loan
- Fixed monthly payments
- Low deposit
- You may be able to refinance the GMFV if you want to keep the bike but don’t have the cash to cover the final payment
- You don’t need to worry about depreciation because of the GMFV
- You can change for a new bike every two/three/four years with minimal outlay
PCP - Disadvantages:
- At the end of the contract you have to make a decision: return the bike, trade it in, or pay the GMFV
- You could be charged for damage to the bike beyond normal wear & tear
- You will be charged for excess mileage if the agreed mileage is exceeded
It’s worth noting that the bike remains the property of the finance company until paid for. This applies to both hire purchase and PCP. You will also need to have fully comprehensive insurance.
As a final note, bikes that depreciate more slowly than others are more effective on PCP agreements. For example, highly sought-after machines like the Ducati Panigale can have higher GMFVs and, consequently, lower monthly payments than you might expect given the list price.
That piece of Italian exotica could be more accessible than you think!