PCP (Personal Contract Plan) – Means of financing a car where a buyer pays a deposit, then makes monthly repayments for a number of years, and the buyer can decide whether to keep the car by paying a balancing fee, or return the car at the end of the agreement.


Costs:


ґ Monthly repayments must be made during the agreement.


ґ A large final payment (Guaranteed Minimum Future Value – GMFV) must be paid if the buyer wants to keep the car.


Risks:


ґ Extra charges may apply if the car has high mileage or damage at the end of the agreement.


Long-term Finance


Long-term finance refers to money borrowed that is repaid over a period of more than five years.


KEYWORDS


The purpose of long-term finance is to pay for long-term investments that provide lasting value and benefits for an individual.


Long-term uses include:


Buying a house / Major building work on a house (building an extension)


Buying an investment property


Long-term loan – A long-term loan is borrowed money that is repaid with interest over a period of more than five years, usually in regular instalments.


Costs


ґ Interest is charged on the loan so you pay back more than you borrow.


Risks


ґ Risk of loss of an asset used as collateral if you cannot repay the loan.


Mortgage – A loan designed to buy a home or other property. Mortgage terms typically range from 20 to 35 years.


Costs:


ґ Interest must be paid over the life of the mortgage.


ґ Longer mortgage terms usually result in higher total interest costs.


Risks:


ґ The borrower may lose their home if they cannot keep up with repayments.


ґ Monthly repayments may increase if interest rates rise.


49


STRAND 1


CHAPTER 5: Saving and borrowing for a household


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