Personal Contract Purchase (PCP)

If you are looking for a new car but don’t have the cash upfront to buy it outright then taking out car finance in the form of a personal contract purchase (PCP) is an option. However, PCP can be a big monthly commitment so here is all the information you need to make an informed decision on whether PCP is right for you. To compare car finance and loan options complete a Choose Wisely loan search.


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Table of contents

Written by Mark Grimley
Read time: ~5 mins
Published: 10th November 2020 Updated: 19th November 2020

What is personal contract purchase (PCP)?

Personal contract purchase or PCP is a type of car finance. It’s a complex financial agreement that can help you afford a new car. Unlike other methods of car finance with PCP you do not pay for the total value of the car but you also won’t own the car (unless you pay the balloon payment at the end of the agreement). Below is a breakdown of the three main parts of a PCP:

The deposit

You will initially have to pay a deposit which is usually around 10% of the total value of the car. The more money you can put down as a deposit, the likelihood you will have to pay less each month.

The repayments

The amount you need to borrow is determined by the lender. They do this by predicting how much the value the car will depreciate over the time you have it.

The ballon payment

At the end of your agreement you will have the option to make a balloon payment. This is a large final sum to buy the car outright. The size of the ballon payment is calculated at the beginning of the agreement and is equal to the believed current value of the car.

How does PCP work?

The way a PCP works can be complicated. Let’s look at an example of how the plan works based on a £10,000 car in which the car finance company calculates will be worth £3,000 in 3 years:

  1. You will pay your 10% deposit, for example £1000 and then you would take out a loan for the remaining amount which would be £9,000.

  2. This is the amount you now owe. However, the lender has calculated that the car will be worth £3,000 at the end of the agreement, so this is taken off the total leaving you with a £6,000 loan plus interest on the £9,000.

  3. At the end of your agreement you can choose to pay the £3,000 balloon payment to buy the car or hand it back.

What should I be aware of when considering a PCP deal?

Before you sign on to a PCP deal you should always check the terms and conditions in the smallprint and see if there are any fees involved. You should make sure you know how much you are paying back each month and what you will be paying back in total to make sure it is affordable for you but also a good deal. Take time to understand what counts as excessive damage as this could impact what you pay at the end of the agreement.

What are the alternatives to PCP?

There are a couple of alternatives to a PCP which include a car loan, hire purchase agreement, leasing or subscription. Make sure to consider all of your options to find the best deal.

What happens at the end of the finance deal?

At the end of a PCP you will have three options. You can choose to pay the balloon payment and buy the car outright. Be careful with this one because there may be added fees involved. The second option is that you can switch your vehicle out for a new car. This is the choice most people opt for. The third and final option is that you hand the car back and walk away from the agreement.

What charges could I face when I hand the car back in?

PCP’s involve charges for different things. You will be charged for any excessive damage to your car (what counts as excessive will be included in your agreement at the beginning of the plan). You will also agree to a mileage amount. If your mileage goes over the number you agreed then you will be charged for this too.

Pros & Cons of PCP

  • The monthly repayments are usually lower than what you would pay on a personal loan or a hire purchase agreement.
  • You don’t have to worry about the car depreciating in value.
  • The plan is relatively flexible.
  • You can benefit from maintenance packages and warranties.
  • You can have a better car than what you would be able to afford outright.
  • With a PCP you don’t own the car for the term of the plan.
  • The interest rates will usually be higher than for a personal loan or a hire purchase.
  • There may be additional charges for mileage.
  • You will be expected to keep the car in good working condition. If you don’t you will be charged a fee.

Personal Contract Purchase FAQs

Where can I get a PCP deal?

PCP’s are available from online brokers, highstreet banks and car dealers.

Does getting a PCP deal impact credit rating?

Yes a PCP deal will affect your credit rating and your credit score will also be checked before the deal is approved. If you miss any payments this will impact your credit history negatively. If you’re struggling to make any repayments contact your lender to come to an agreement.

Can I cancel a personal contract plan early?

It’s important to choose the right deal to suit your financial situation. The longer the deal is the more you will pay for the car in the end. However, short deals mean that the monthly repayments are higher. Under the Consumer Credit Act you can return the vehicle to the lender as long as half or more of your repayments have been made. This is called voluntary termination.

Written by
Mark Grimley
Head of Partnerships & Take Control Author at Choose Wisely

Mark joined Choose Wisely in 2015. He continues to work in close contact with the providers, brokers and journalists operating in the world of consumer credit.

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