Buying a car using a Personal Contract Purchase (PCP)

PCP is the most popular type of car finance. You pay an initial deposit, followed by lower monthly instalments for the remainder of the term, to pay of a proportion of the loan amount. At the end, you have to option to pay a large final payment to clear the remaining balance and own the car outright, or hand it back, or exchange it for another car.

Words by: First published: 5th November 2018
A Personal Contract Purchase (PCP) helps keep monthly payments low, as you don’t have to pay a lump sum (the balloon payment) until the end of the plan, and you only have to pay that if you want to own the car. You then have several options.
What is a PCP (Personal Contract Purchase)?
A PCP is one option when you’re looking to get a new car. You don’t pay off the full value of the car, and you give it back at the end of the contract, unless you choose to buy it.

PCPs are good if you want to change your car every two or three years. They’re mostly used for new car finance, but can be used to finance a used car, too.

PCPs are arranged through the dealer or manufacturer. The deposit you’ll need to pay tends to be around 10% of the car’s price (although some PCPs don’t have any deposit required). Some manufacturers offer deposit contributions if you’re buying a new car, but only if you use their finance.

With PCP, you don’t pay the total cost of the car. You just pay back the difference between the car’s sale price (when new), and what it's forecast to be worth at the end of the agreement.

This is known as the Guaranteed Future Value (GFV). It’s predicted using typical depreciation rates for the car’s make and model, and takes your expected mileage into account.

You also pay interest, on the total price of the car, not just the amount you’re borrowing, and typical APRs are 4-7%.

PCPs allow you to keep your monthly payments low. They work best if you want to start another one at the end, and if the car is worth enough to cover the balloon payment and contribute towards another deposit.
At the end of the PCP, you have three choices:
  • 1. Hand the car back to the dealer. If you plan to do this, you’ll be better off leasing as it will likely work out cheaper. You’ll also have to pay an extra charge if you’ve gone over the agreed mileage limit.
  • 2. Buy the car by paying the remaining balance (balloon payment), and usually an optional purchase fee, which can be up to £500. This is an expensive option if you want to buy the car outright, and HP may be a better bet if your intention is to own the car. You can take out a loan or other finance agreement to pay the lump sum.
  • 3. Start another PCP deal, which is the most common option. If the car is worth more than the outstanding finance, you can use that ‘equity’ as deposit on a PCP deal for a new car. However, if you hand back the car and don’t take out another PCP, you don’t get to keep the extra cash. If the car isn’t worth more, the finance company takes the hit, and the sensible option would be to hand the car back.
Pros of PCP:
  • You can drive around in a different car every few years.
  • The amount you pay each month is fixed.
  • Some PCP agreements include servicing and maintenance.
  • You can choose from a very wide selection of cars, and you could access a more expensive car than you could with hire purchase (HP) or a loan.
  • Dealers and manufacturers occasionally offer great deals on PCPs, including help towards deposits.
Cons of PCP:
  • Deposits tend to be higher than those needed for HP.
  • Until you make the final balloon payment, you don’t own the car; you are leasing it from the finance company.
  • If you go over your pre-arranged mileage limit, you will likely be charged if you want to hand the car back.
  • If you damage the car, the dealer might charge you for repairs.
  • If you want to own the car at the end of the period, HP or a loan are probably a cheaper option.
  • Sometimes, a dealer may offer a 0% APR deal to tempt you, but some are too good to be true, and the money will be found from elsewhere i.e. a bigger balloon payment, or big charges for excess mileage or minor damage.