Guide

Buying a car using a Personal Contract Purchase (PCP)

PCP is a type of car finance. You pay an initial deposit, followed by lower monthly instalments for the remainder of the term, to pay off a proportion of the loan amount. At the end, you have the 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
Personal Contract Purchase (PCP) is a type of car finance. It works on the principle of deferring a large chunk of the payment until the very end of the loan. This helps keep monthly payments low, as you’re making payments on a smaller sum throughout the agreement, and you only have to pay the lump sum - or balloon payment as it’s sometimes known - if you want to own the car outright. That’s just one of several options you have at the end of the agreement.
What is PCP (Personal Contract Purchase)?
At the beginning of a PCP agreement, you usually pay a deposit (typically around 10%, although this can vary greatly and some PCP deals don’t require one at all), and you then pay a monthly sum over a fixed period of time (usually between two and four years).
What’s the difference between PCP and HP?
With the other popular type of finance, called Hire Purchase (or HP), your monthly payments are based on the full cost of the car plus interest. That makes the payments comparatively expensive, but on the other hand, there’s no final balloon payment and (provided you keep up your payments) you always own the car at the end.

The main difference between a PCP is that for the duration of a PCP agreement, you’re not paying back the full cost of the car. You’re just paying back the difference between the car’s original price when new, and what it's forecast to be worth at the end of the agreement, which is the bit that gets deferred until the end.

This is known as the Guaranteed Future Value (GFV), and it’s roughly the same amount as the size of the final payment you can make to own the car outright. The GFV is predicted using typical depreciation rates for the car’s make and model, and takes your expected mileage into account.

Don’t forget, though, that your payments are also likely to include a rate of interest, (although some manufacturers do offer 0% finance deals on selected models) and also that you’re paying interest on the total price of the car, not just the amount you’re borrowing. Typical APRs are between 4 and 7%.
How do I get PCP finance?
PCPs are arranged through the dealer or manufacturer, but the finance agreement you sign will most likely be with a separate finance company. 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 approved finance products.
Why should I consider buying a car on PCP?
PCPs are good if you want to change your car every two or three years, or if you’re unsure whether you wish to own the car at the end of the agreement or not. They’re mostly used for new car finance, but can be used to finance a used car, too. 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.
What happens at the end of a PCP agreement?
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 may 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, or if there’s damage on the car over and above what the lender would consider to be ‘wear and tear’.
  • 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 option 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, you might be charged 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.