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.

Alex Hasty
Insurance and finance expert
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Posted 9 DECEMBER 2021

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 to 48 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.

What is the difference between PCP and Hire Purchase (HP)? 

While personal contract purchase and hire purchase finance are similar, there are some key differences. With both types of finance, you’ll pay a deposit and then make monthly repayments, but a hire purchase agreement will make you pay off the full value of the car over the course of the agreement, meaning you’ll own the vehicle at the end. Whereas, with a PCP finance agreement, you’ll only pay what your lender predicts the car will lose in value over the course of your agreement. This means your monthly payments should be lower, compared to a hire purchase agreement, if you were buying the same car. 

A PCP deal also provides you with multiple options at the end of your agreement. You can either keep the car (by making a final, large balloon payment), give the car back and make no further payments, or take out a new agreement.

How are PCP finance payments calculated? 

To start with, you’ll pay a deposit, this is usually 10% of the car’s value. However, because your loan isn’t covering the full value of the car, you’ll only be paying for the depreciation value over the course of the agreement. This makes PCP finance difficult to calculate, as the amount you’re borrowing is down to the lender’s prediction. 

As an example, you buy a car worth £10,000 on a three-year agreement. The lender might predict a loss in value of 40%: £4,000, making the car worth £6,000 after three years. You pay a 10% deposit of £1,000, leaving you with a balance to repay of £9,000. However, because it’s been agreed the vehicle will be worth £6,000 at the end, you only need to repay £3,000 (although interest will be calculated on the full £9,000). You’d then be paying a monthly interest rate over the course of your agreement, with a final £6,000 ‘balloon’ payment being made, if you decide to keep the car. If the vehicle’s market value is more than £6,000 after three years, it’s sometimes possible to add this equity to the deposit for your next car should you choose to purchase one through the same provider.

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.
  • 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.

Where can I find a PCP finance deal? 

There are two places you can go to find a PCP finance deal. The first is the dealer you’re buying the car from. They’ll have various car finance plans available, including PCP, and they can sometimes offer you exclusive deals. However, going with what the dealer offers can leave you limited for options. An alternative is to use an online broker. These can be compared online to find a quote, which provides you with potentially dozens of options to choose between. They can also be used as a good bargaining tool when you go to negotiate at the dealership. 

Unfortunately, Compare the Market don’t compare personal contract purchase finance, but we can help compare hire purchase agreements and personal loans.

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 10 years, and you won’t have to secure it against an asset, like your 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.

Frequently asked questions

Can I only use a PCP to finance a new car?

No, personal contract purchase finance can be used to buy new or used vehicles.

How can I make PCP more affordable?

Here are a few tips to get cheaper PCP finance: 

  • Pay a bigger deposit – while 10% is normal for a PCP deposit, that doesn’t mean you can’t pay more. A bigger deposit leaves you with less to pay back monthly and could reduce the interest rate you’re charged, which will also make your monthly repayments cheaper.
  • Spread your payments over a longer agreement – while we wouldn’t recommend this, as you’d be paying more over the full agreement, spreading your finance over a longer term should make your monthly repayments cheaper, potentially making them more affordable for you.
  • Buy a car that holds its value – because PCP finance sees you borrow against the car’s depreciation value, cars that hold their value better mean you might not need to borrow as much, even if the car itself is worth more.
  • Buy a cheaper car – yes, it’s obvious, but buying a cheaper car means you’re borrowing less, which means you’ll have less to pay back and with cheaper interest.

What happens if I decide to return the car?

If you decide you want to return the car at the end of your PCP agreement, you can simply hand the keys back and avoid the final and larger balloon payment.

Can I end my PCP finance contract early?

Yes, you should be able to end your PCP finance contract early, but you should check your contract wording. This is because there will almost certainly be some sort of termination or early repayment fee that applies. With these in mind, you’ll need to decide if ending your agreement early is worth it.

How do PCP finance trade-ins work?

If you decide, at the end of your PCP agreement, that you want a different car, you can simply hand back the keys and take out a new agreement for a new car. If you’re wanting to end your existing agreement early to trade in for a new model, this is slightly more complicated.

By ending your agreement early, you’ll need to settle the outstanding balance, along with any extra fees. This debt will then be considered when setting up your new PCP finance plan for the car.

If the value of the car you’re trading in is more than the outstanding settlement fee, then you could use any remaining value as a deposit for the new car. This could reduce the monthly repayments on your new plan.

What happens if I crash my car on PCP finance?

If you crash a car bought using PCP finance, this could be a problem. Car insurance covers the car for its market value at the time of the accident, this means you could be left to make up for any shortfall. To help protect you against any shortfall that you’ll need to bridge, you could consider taking out GAP insurance.

Do I need GAP insurance with PCP finance?

While you don’t have to take out GAP insurance with a car bought on a PCP finance plan, you might want to consider it. This is because it can protect you against any shortfall between the price you originally paid (which makes up the balance you owe on your finance agreement) and the value of the car at the time it’s stolen or involved in an accident. This makes GAP insurance an attractive option for drivers who buy cars on finance.

What can I do if I am falling behind with car finance payments?

If you think you’re struggling to keep up with your car finance payments, the best thing to do is contact your lender as soon as possible. By doing this, you might be able to come to some sort of arrangement and potentially avoid a lot of hassle.

Unfortunately, you’re likely to be charged extra fees for late or missed payments, and the lender could even repossess the car to repay your debt.

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