PCP finance explained

If you don’t have the money to buy a car outright, PCP finance is one way to get a new set of wheels. Our simple guide tells you the basics of how it works, including the pros and cons of PCP and how it compares with other types of car finance.

If you don’t have the money to buy a car outright, PCP finance is one way to get a new set of wheels. Our simple guide tells you the basics of how it works, including the pros and cons of PCP and how it compares with other types of car finance.

Anelda Knoesen
From the Money team
5
minute read
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Posted 24 DECEMBER 2020

What is PCP finance?

PCP, or personal contract purchase, is a type of loan that allows you to buy a car without paying the full cost upfront. It’s based on the car’s depreciation value rather than its total value. PCP can be used for both new and used vehicles.

You’ll usually pay a deposit, then make monthly payments to a car finance provider over a fixed term. Most PCP car deals in the UK are available for 24 or 36 months, although some can last longer. Your monthly payment will depend on how big a deposit you put down and the length of term you sign up for.

PCP deals give you the option to hand back the car at the end of the agreement, part-exchange or buy the vehicle outright.

How does PCP finance work?

To get PCP car finance, you’ll need to pass a credit check – although, typically, this won’t be quite as strict as with a personal loan. That’s because PCP is secured against the car, so if you fail to keep up with your repayments, the finance provider can reclaim the vehicle.

The amount you borrow is based on how much the finance provider thinks the car will lose in value over the term of the deal. So, unlike with a standard car loan, you’re not paying off the full value of the car.

Some, but not all, lenders will require around a 10% deposit. 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.

At the end of the contract, you can return the car and walk away. If you want to keep it, you’ll have to make a ‘balloon payment’ to buy it outright. The balloon payment is a lump sum that represents the car’s worth by the end of the contract. When you sign up to PCP the final balloon payment should be fixed, so you’ll know from the start what the cost of keeping the vehicle will be. Alternatively, you can trade in the car and start a fresh PCP on a new car.

Why buy a car with PCP finance?

Getting a car on finance can be a good option for many motorists. The main benefits of PCP car deals include:

  • Affordability
    PCP plans generally have lower monthly repayments than a personal loan or other types of car finance because you’re only paying off a portion of the car’s value. However, the rate you’re offered will depend on your individual circumstances.
  • Flexible terms
    PCP deals offer you different payment terms and options at the end of the deal, including the chance to buy the car outright.
  • Easy to upgrade
    If you like to regularly get a new car, contract purchases let you trade up easily. There’s no hassle of selling the car yourself if you want a different vehicle.
  • Extras included
    Dealers will often offer car insurance, warranties plus service and maintenance packages as part of the PCP deal. If you want these included in your package, make sure they represent good value.

What are the disadvantages of PCP finance?

This type of car finance isn’t suitable for everyone. The main drawbacks of PCP car deals include:

  • High final payment
    The balloon payment (also known as a guaranteed minimum future value) at the end of the contract can be expensive, especially if the car has kept its value.
  • Excess mileage charges
    Your PCP agreement may limit how many miles you can drive, so if you exceed the agreed mileage you’ll be charged extra. You may also be fined for any excessive wear and tear to the vehicle.
  • Low equity
    If the predicted depreciation value of the car is set close to its actual value, you won’t have much equity to put towards a deposit on another car – so you may need to save for a deposit for your next vehicle too.
  • 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.

PCP vs lease. Which is right for me?

If you know from the outset that you definitely won’t want to buy the car at the end of the contract period, car leasing may be a better option for you.

You can rent a brand-new car by paying monthly instalments over a set period but, with a lease, you’ll never have the option to own it outright.

So consider how important flexibility is to you, as PCP gives you more options at the end of the deal. It’s also easier to end a PCP contract early than it is with leasing, for example if you lose your job and can no longer afford the monthly repayments.

What other car finance options do I have?

Aside from PCP and leasing, you also have other options available to you when choosing how to finance the purchase of a new or used car, including:

  • a personal loan – you can borrow a lump sum and spread the cost over up to seven years, and you won’t have to secure it against an asset, like you home. You’ll also own the car outright from the day the dealer receives the money. That means you can modify or sell the vehicle at any time.
  • hire purchase – as with PCP, you make monthly payments to a car finance provider over a fixed term. The difference is that you’re paying off the full value of the car, not its depreciation value, and you’ll own the vehicle outright after the final payment.

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