If you`re in the market for a new car but can`t afford to buy one outright, a personal contract purchase (PCP) agreement may be a great option for you to consider. So, how does a car PCP agreement work?

Firstly, a PCP agreement is a type of car finance that allows you to drive a brand new car for a set period of time, usually two to three years. You won`t own the car outright, but will have the option to purchase it at the end of the agreement if you wish.

When you choose a PCP agreement, you`ll make an initial deposit on the car (usually around 10% of its value). Then, you`ll make regular monthly payments based on the difference between the initial deposit and the car`s estimated value at the end of the agreement. This estimated residual value is known as the Guaranteed Minimum Future Value (GMFV).

For example, if a new car is worth £20,000 and has a GMFV of £10,000 at the end of a three-year agreement, you`ll need to make monthly payments on the remaining £10,000. This means your monthly payments will be lower than if you were financing the full value of the car.

During the agreement period, you`ll need to adhere to certain conditions, such as a maximum annual mileage allowance and ensuring the car is kept in good condition. If you exceed the mileage allowance or the car is damaged beyond normal wear and tear, you may be subject to additional fees.

At the end of the PCP agreement, you have three options:

1. Return the car to the dealer and walk away. This means you won`t own the car, but you won`t be responsible for selling it or trading it in.

2. Purchase the car outright by paying the GMFV. This means you`ll own the car and can keep driving it for as long as you`d like.

3. Trade in the car for a new PCP agreement. If you want to continue driving a new car, you can use the equity in your current car (the difference between the GMFV and the car`s actual value) as a deposit on a new PCP agreement.

Overall, a PCP agreement can be a flexible and affordable way to drive a new car without committing to owning it outright. But as with any financial agreement, it`s important to do your research and ensure it`s the right option for your individual circumstances.