What is PCP 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 PCP works, including the pros and cons, 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 PCP works, including the pros and cons, and how it compares with other types of car finance.
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. Monthly repayments are often lower than hire purchase (HP) financing or a personal loan, so it could be a more affordable option if you change your car regularly.
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?
Here’s how PCP car financing works:
1. Undergo a credit assessment.
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.
2. Put down a deposit.
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.
3. Make monthly repayments until the end of the term.
At the end of the contract, you’ll have three options:
- Return the car and walk away
- Trade it in and start a fresh PCP on a new car
- Keep the car and 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.
What’s 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 pay a deposit and then make monthly repayments. But with a hire purchase agreement, you pay off the full value of the car over the course of the agreement, meaning you’ll own the vehicle at the end.
With a PCP finance agreement, you only pay what your lender predicts the car will lose in value over the course of the 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 do PCP finance payments work?
You start by paying a deposit, 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.
The following example gives you a rough idea of how your PCP payments could work:
- You buy a car worth £10,000 on a three-year agreement.
- You put down a 10% deposit (£1,000) leaving a remaining balance of £9,000.
- The lender predicts a loss in value of 40% (£4,000) over three years, so you’ll only need to repay £3,000 (although interest will be calculated on the full £9,000).
- At the end of the term, your car will be worth £6,000.
- If you decide to keep the car, you’ll need to make a final balloon payment of £6,000.
However, it’s possible that the market value could be more than the predicted worth after three years. In that case, you might be able to add the additional equity to a deposit for your next car if you’re buying through the same provider.
What are the pros and cons of PCP finance?
Getting a car on finance can be a good option for many motorists. However, it’s important to weigh up the pros and cons before deciding if it’s the right choice for you.
Advantages of PCP
- 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 deal 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, and service and maintenance packages as part of the PCP deal. If you want these included in your package, make sure they represent good value.
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. 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.
How can I make PCP more affordable?
Here’s a few tips to help you 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 – spreading your finance over a longer term should make your monthly repayments cheaper, potentially making them more affordable for you. Think carefully about this, though, as it means you’ll pay more over the full agreement.
- 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.
- 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 cheaper interest.
Where can I compare PCP finance deals?
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 the cheapest PCP car deals. However, going with what the dealer offers can limit your options.
An alternative is to use an online broker, which could potentially offer you dozens of options to choose from – helpful when you negotiate at the dealership.
Unfortunately, Compare the Market doesn’t compare personal contract purchase finance, but we can help compare personal loans.
What other car finance options do I have?
Aside from PCP and leasing, car finance options include:
- Personal loan – you can borrow a lump sum and spread the repayments over up to 10 years. Plus, you won’t have to secure the loan against an asset, like your home. You’ll 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.
Insuring a car on PCP
When it comes to insurance, it’s important to remember that you don’t own the car during the PCP term.
When you complete a car insurance quote, you’ll be asked who the legal owner is. In the case of PCP, the legal owner is the car finance company. You are the registered keeper.
Make sure you clearly state this when you take out an insurance policy. If it’s not clear in your application who the legal owner is, you could find yourself without cover.
Some insurance providers may charge higher premiums for PCP cars, so it’s always a good idea to shop around and compare a range of quotes.
Our car insurance comparison service is quick and easy to use. It only takes a matter of minutes to compare quotes.
Compare car insuranceFrequently asked questions
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 decide you want to return the car at the end of your PCP agreement, you can simply hand back the keys and avoid the final balloon payment.
Can I end my PCP finance contract early?
Yes, you should be able to end your PCP finance contract early, but check your contract. There will 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 is pretty straightforward. At the end of the term, simply hand back the keys and take out a new PCP agreement for the new car.
If you want to trade-in early, before the end of the term, it’s slightly more complicated. 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 your next 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 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.
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?
You don’t have to take out GAP insurance with a car bought on a PCP finance plan, but it might be worth considering.
GAP insurance 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.
What can I do if I am falling behind with PCP car finance payments?
If you’re falling behind with your PCP repayments, contact your lender as soon as possible. You might be able to come to an arrangement.
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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Alex Hasty - Insurance comparison and finance expert
At Compare the Market, Alex has had roles as Commercial Associate Director, Director of Trading and Director of Growth. He’s currently responsible for the development and execution of Comparethemarket’s longer-term strategic options, ensuring the right breadth of products and services that meet customer needs.