What is PCP finance?
PCP, or personal contract purchase, is a type of car finance that lets you spread the cost of a new or used car, instead of paying the full price upfront.
You pay a deposit, then make monthly payments to a car finance provider over a fixed term. At the end, you can either hand back the car, part-exchange it for another in a new PCP deal or make a final ‘balloon’ payment to buy the car outright.
Monthly repayments for a PCP deal can often be smaller in size than those for HP (hire purchase) or a car loan. This is because you’re effectively only paying for the car’s depreciation – how much it’s expected to fall in value while you have it – instead of its actual price.
If you regularly change your car, a PCP deal could be a more affordable option for you.
How does PCP finance work?
Here’s how PCP car financing works:
1. Pass a credit check
You’ll need to go through a credit check although, typically, it won’t be as strict as for a personal loan. This is because a PCP deal is secured against the car, so if you fail to keep up with your repayments, the finance provider can reclaim the vehicle.
2. Put down a deposit
Some lenders (but not all) ask for a deposit of around 10%. The bigger the deposit you have, the less you’ll need to borrow. You can use an online PCP finance calculator to find out how much you could borrow.
Make sure you never borrow more than you can afford to pay back.
3. Make monthly repayments until the end of the term
Most PCP car deals in the UK are available for three to six years, although some can last longer. Your monthly payment will depend on the size of your deposit, the interest rate you pay and the length of term you sign up for.
At the end of the contract, you’ll have to decide on one of the three options:
Return the car and walk away
Trade it in and start a fresh PCP agreement on another car
Keep the car and make a balloon payment to buy it outright.
The balloon payment is a lump sum based on the car’s worth by the end of the contract.
When you sign up to a PCP agreement, the final balloon payment should be fixed, so you’ll know from the start what the cost of keeping the vehicle will be.
Find a car finance dealHow do PCP finance payments work?
PCP finance is difficult to calculate, as the amount you borrow is based on how much the lender thinks your vehicle will depreciate in value.
Here’s an illustrative example to give you a rough idea of how PCP payments could work:
You take out a three-year PCP agreement on a car valued at £23,000. You put down a 10% deposit of £2,300, leaving £20,700 to finance.
Over three years, your car is predicted to fall in value to around £11,000.
You pay off the difference between what it’s worth now and what it will be worth. That’s £9,700, spread over 36 monthly payments, plus interest and fees.
At the end of the contract, you can pay the remaining £11,000 to keep the car, return it to the dealership, or trade it in for a new one.
What are the pros and cons of PCP finance?
Advantages of PCP finance
Affordability – monthly repayments are typically lower than for a personal loan or hire purchase.
Easy to budget – fixed payments mean you know exactly what to expect each month.
Flexibility – you can buy the car outright at the end of the agreement or return it to the dealership.
Regular upgrades – you can change the car to a newer model each time an agreement ends.
Extras included – dealers often offer car insurance, warranties, and service and maintenance packages as part of a PCP deal.
Disadvantages of PCP finance
Big final balloon payment – if you want to keep the car, the balloon payment at the end of the contract (also known as a guaranteed minimum future value) can run into thousands of pounds.
Excess mileage fees – you’ll pay a financial penalty if you go over the agreed mileage limit.
Damage charges – you may have to pay for damage to the car or excessive wear and tear.
No outright ownership – the car won’t legally be yours during the contract period. You’ll only own it at the end if you pay the balloon payment.
Risk of losing the car – the PCP agreement is secured against the car, so you could lose the vehicle and damage your credit score if you fail to keep up with repayments.
How can I make PCP more affordable?
Here are a few tips to help you get cheap PCP deals:
Pay a bigger deposit – while 10% is normal for a PCP deposit, you can pay more if you can afford it. A bigger deposit leaves you with less to pay back monthly and could reduce the interest rate you’re charged.
Spread your payments over a longer agreement – spreading your finance over a longer term could make your monthly repayments cheaper. But you’ll pay more in interest overall.
Choose a car that holds its value – because you borrow against the car’s depreciation value, you might not need to borrow as much for a model that holds its value well.
Buy a cheaper car – it might be obvious, but a lower price for a car means you have less to borrow and pay back.
Where can I compare PCP finance deals?
We can help you find the right car finance for your circumstances from a wide panel of lenders.
You’ll get a decision in minutes and be helped through your car-buying journey.
What other car finance options do I have?
Aside from PCP, car finance options include:
Hire purchase
Similar to PCP, you make monthly payments to a car finance provider over a fixed term. But the difference is that with hire purchase you’re paying off the full value of the car – not its depreciation value. And you’ll own the vehicle outright after paying an ‘option to purchase’ fee after your last monthly payment.
Read more on the key differences between PCP and hire purchase finance.
Personal car loan
You borrow a lump sum then repay the car loan, plus interest, in monthly instalments over a fixed period. You’ll own the car outright from the day the dealer receives the money. This means you can modify or sell the vehicle at any time.
FAQs
Can I only use PCP to finance a new car?
No, personal contract purchase finance can be used to buy new or used vehicles.
What happens if I decide to return the car?
If you want to return the car at the end of your PCP agreement, you can simply hand it back to the dealership. You won’t need to pay the final balloon payment.
Can I end my PCP finance contract early?
Yes, you can typically end your PCP finance contract early, but check your finance agreement. There’ll almost certainly be a termination or early repayment fee.
With this in mind, you’ll need to decide if ending your agreement early is worth it.
How do PCP finance trade-ins work?
Trading in your car with the same dealer can be straightforward. At the end of the finance term, you hand back the keys and take out a new PCP agreement for a different car.
If you want to trade-in before the end of the term, you’ll need to get a settlement figure (how much you have left to pay on the finance) from the dealer.
Get your car valued and subtract the settlement figure from this price. This will show how much equity (if any) is in your vehicle.
Positive equity means your car is worth more than you owe. You can use this sum towards buying your next car.
Negative equity means you owe more than the car’s worth. You might need to pay the difference or keep your car until you’re in positive equity.
Who pays for repairs on a PCP car?
As the registered keeper, you’re responsible for any repairs not covered by your warranty. This includes issues found during routine servicing or damage, such as scrapes and dents.
You’re free to choose your own garage for servicing or to make any repairs, as long as it uses approved parts.
What happens if I crash my car on PCP finance?
If you crash your car during the PCP term, your car insurance will only cover the car for its market value at the time of the accident. This means you could be left to make up any shortfall on what you owe to the car finance provider.
To help protect you against any shortfall that you’ll need to bridge, you could consider taking out GAP insurance.
What can I do if I’m falling behind with PCP car finance payments?
If you’re falling behind with your PCP repayments, or are in danger of doing so, contact your lender as soon as possible. You might be able to come to an arrangement.
However, you’re likely to be charged extra fees for late or missed payments. The lender could even repossess the car to recoup your debt.
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As well as writing for Churchill and Privilege insurance websites, Karen’s CV includes working with M&S, Debenhams, Tesco, Sainsbury’s and John Lewis. With over 20 years of editorial experience for big household names she leads a talented content team with a focus on simplifying personal finance for everybody.
Ele Clark is an award-winning editor who has held leadership roles at Which? and news-stand publications in London and Dubai. She’s appeared across the press and media, including BBC’s Panorama. With almost 20 years’ experience in personal finance, insurance and consumer journalism, she leads a talented team at Compare the Market, creating insightful, accessible content to help people make informed financial decisions.
Sajni is passionate about finding money products to help you make great financial decisions. She keeps track of the latest trends and evolving markets to find new ways to help you save money.
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What our expert says...
"PCP often appeals because it can lower the monthly cost of getting behind the wheel, but that isn’t the whole picture. What matters just as much is how comfortable someone feels with the structure of the agreement and the options they’ll face when the deal comes to an end."