What is PCP car finance?
Personal Contract Purchase (PCP) is a type of car finance that allows you to buy a car with credit, helping you to spread the cost. At the end of the loan term, you can choose to return the vehicle or pay the market value and keep it.
Monthly repayments can be lower than other car finance products, but if you decide to keep the car at the end of the term, you must make a large final payment known as a balloon payment.
How does PCP finance work?
Personal contract purchase deals function similarly to personal loans, where you borrow money to purchase an item and repay the loan monthly with added interest. However, several things make PCP car deals unique.
A PCP finance agreement comprises of:
- A deposit paid upfront
- The loan amount
- a final balloon payment (if you keep the car)
How much is the PCP deposit?
The deposit on a PCP car deal is typically around 10% but may vary between dealerships and lenders. The bigger the deposit you put down, the less you’ll need to borrow.
You may have the option to trade in your old vehicle instead of a cash deposit.
What is a balloon payment?
A balloon payment is an amount you'll pay if you decide to keep the car at the end of the contract.
The cost of a balloon payment is agreed upon before you sign your PCP deal and will depend on how much the car dealer thinks your car will be worth when the contract ends - it's known as the Guaranteed Minimum Future Value (GMFV).
There may be conditions attached to the GMFV, such as a limit on mileage and the age of the car at the end of your contract.
What is the loan amount?
The loan amount covers a portion of the car’s value. It's the difference between the GMFV figure and the car's initial price minus the deposit you've paid upfront.
The loan term usually lasts two to four years, and you'll repay it in monthly instalments with interest.
What options do I have at the end of the contract?
Towards the end of your PCP deal, you'll need to decide what you want to do next.
You'll usually have three options:
- Trade in your car and start a new PCP contract
- Pay the balloon payment and keep the car
- Return the car to the dealer
Who owns the car with PCP finance?
With PCP car finance, you're effectively hiring the car for the contract duration, so you won't own it until the final balloon payment is made. Once you've paid the final lump sum, you will own the car and can sell it if you wish.
If you return the car or trade it in for a different vehicle at the end of the term, you'll have no further payment obligations or responsibility for it.
How much does a PCP deal cost?
As well as the price of the car, the cost of PCP car deals depends on these factors:
- Deposit - the more you put down upfront, the smaller the loan amount
- Interest rate - a lower interest rate will make your borrowing cheaper
- Loan term - a longer loan term may reduce your monthly repayments, but depending on the interest rate, it could cost more overall
- GMFV - this will determine the size of your balloon payment
Despite lower monthly payments, a PCP deal isn't necessarily the cheapest car finance option, but it's a convenient and popular way to buy a vehicle.
Where can I get a PCP car deal?
You can get PCP finance through your car dealership or find a PCP car deal online. An ideal place to start your search is a comparison website offering a range of the best PCP deals to suit your financial needs.
Most PCP finance gets used for new vehicles, but whether you're searching for PCP deals on used cars or want an electric car PCP, shop around and compare PCP quotes for your car purchase.
What are the pros and cons of PCP car finance?
A PCP deal can be a great way to finance your vehicle, but there are also some risks to be aware of. To help you decide if PCP finance is right for you, here are some of the main pros and cons:
- Monthly repayments can be lower than hire purchase deals or a car loan
- Drive a new car that you may not be able to afford purchasing outright
- You only borrow a portion of the purchase price
- You can swap or upgrade your car regularly
- A choice of options at the end of the term
- A minimum deposit is required
- PCP deals may require a minimum car value
- PCP deals may require a minimum car value
- Mileage restrictions usually apply
- You'll need a lump sum to buy the car outright
- At the end of the term your car could be worth less than the final balloon payment agreed upon
Is PCP better than Hire Purchase?
It depends on your financial circumstances and whether you prefer to change your car regularly or plan to own your vehicle outright at the end of the contract.
If you're looking for lower monthly repayments and plan to trade in your car at the end of the term, then a cheap PCP deal could be better for you.
However, hire purchase could be a better option if you're hoping to own a car eventually and can afford higher monthly repayments.
Is buying a car on PCP a good idea?
There are advantages and disadvantages to all car finance options. The decision comes down to what car finance deal best suits your financial circumstances and the type of car you're purchasing.
Weigh up the pros and cons, and take time to understand all the PCP options and how much they cost. Finally, read the terms and conditions carefully before you sign any agreement and check for any restrictions, clauses or additional fees.
What are the alternatives to PCP finance?
Personal car loan
This unsecured loan is the most straightforward car finance option. The interest rate is fixed, and repayments are made monthly over a set period between one and seven years. It's up to you to choose the term, but the longer you take to repay what you’ve borrowed, the more interest you'll pay.
A personal car loan is ideal if you have a good credit score and regular income. Banks and direct lenders offer personal car loans, so it's the best car finance option if you want to own your car immediately.
Hire Purchase (HP)
With a hire purchase agreement, you'll make monthly repayments to rent the car and pay interest on top. Once the final payment has been made, you'll own the vehicle.
You'll need to pay a deposit of at least 10%, and the more you put down, the cheaper your monthly repayments will be. You can choose the loan terms, usually up to five years.
Hire purchases are offered directly by car dealers, so they're easy to set up and can be arranged at the dealership on the day of purchase.
Leasing
Leasing a car is sometimes referred to as personal contract hire. It's a cost-effective option if you don't mind 'hiring' the car or only need a vehicle for a short period of time.
Like other finance agreements, you'll pay a deposit upfront and make monthly repayments. Upfront costs for leasing are sometimes more expensive than other car finance because you may have to pay up to three months of rental in advance plus a deposit to cover the cost of wear and tear.
Personal Contract Purchase FAQs
Yes, it's possible to get a voluntary termination, but there are pros and cons to consider, and there may also be restrictions.
If you pay your PCP contract off early, you'll save money on interest payments and take ownership of the car more quickly. However, depending on the settlement figure (which includes the GMV and any early repayment fees), you'll likely need a sizable sum to pay off the agreement.
Yes, you can use PCP on used cars and vehicles. When you get a PCP quote, you'll need to provide the vehicle details.
As long as you make your PCP repayments in full and on time, your credit rating won't be affected once your PCP application is approved; in fact, a PCP finance plan could help you to improve your credit score over time.
However, if you’re in the process of applying, a hard credit check will leave a record on your credit report. Too many hard credit checks within six months may temporarily damage your credit rating, making it more challenging to be approved for credit in the short term. One application for credit in isolation should not impact your credit score.
Yes, it's possible, but it'll be trickier to get approval for the best PCP car deals, and the interest rate you're offered will likely be higher.
Try to improve your credit score before applying for a PCP. You'll find that once your credit score improves, you'll get access to cheaper PCP deals.