Personal Contract Purchase (PCP) car finance is a great way to buy your new car for affordable monthly payments over 2-5 years. PCP deals are flexible by nature too, so you can choose whether you want to own the car, part-exchange it or hand it back at the end.
Are you looking for the best way to finance your next car? Discover 5 benefits of PCP car finance to find out if it’s worth it in our guide.
PCP car deals are so attractive to car buyers because the monthly payments tend to be lower than other forms of finance. This is down to a number of factors, including:
Flexibility can’t be underestimated when it comes to car finance, and with a PCP agreement you get plenty of it.
At the end of a PCP deal you don’t have to own the car. The majority of people financing a car this way don’t as it means paying a lump sum at the end known as the 'balloon payment'. Not everyone can afford the balloon payment, but the good news is that you have two other options when your PCP agreement finishes.
In order to compete with growing car supermarkets and third-party lenders, manufacturers tend to offer exclusive discounts on their new stock. On top of this they can usually offer lower interest rates too that make monthly payments cheaper for new models.
PCP agreements were originally only available on new cars, but you can now finance a used car this way too. The beauty of this is that it gives you more options to get your hands on the right car for you at the right price.
There are benefits and drawbacks of both used and new cars that you’ll need to consider before making your decision.
Used cars tend to offer cheaper monthly payments because they don’t depreciate as quickly as new cars. However, they don’t get the same benefits that a new car does, such as fewer miles on the clock and warranty protection. If you’re interested in a used car, make sure it comes with a full service history – this way you can make sure it’s been looked after by previous owners.
If you want to check the history of a car for free, you can do this for free online using GOV.UK.
If you want to finance a car then a PCP deal is by far one of the most flexible options when it comes to your loan terms.
For starters, you can decide what amount of cash you want to pay upfront – usually this is around 10%, but you can put more down to make your monthly payments cheaper.
In terms of how long you can finance the car for, this is also pretty flexible as PCP deals can last anywhere from 2-5 years. Finally, you’ve got your annual mileage cap, which can be between 6,000-30,000 miles per year depending on how far you drive.
At the beginning of any PCP deal you’ll be given a definite cost to buy the car outright at the end of the agreement. This balloon payment will be significantly more than your other monthly payments for the car, which can price many people out of wanting to own the car.
The good news is that the balloon payment won’t change, regardless of whether used car prices fluctuate during your time with the car. So, if you decide after the first year of your agreement that you like the car and want to own it, you can start saving early in order to afford it.
If you decide to return the car at the end of a PCP agreement, it’s important that you make sure there’s no damage. Otherwise you’ll be charged to have it fixed by an approved garage.
The finance provider will assess the condition of the car under using fair wear and tear guidelines, so you won’t need to keep it in showroom condition.
As long as the state of the vehicle reflects the number of miles you’ve driven it and years you’ve had it, you won’t be whacked with damage charges.
PCP is a finance product, so you’ll need to undergo a credit check in order to prove to a lender that you can afford the monthly loan repayments. If you have a poor credit history, you may still be able to finance your new car with a PCP. But lenders will often put higher interest rates in place that make monthly payments for the car too expensive.
You can check your eligibility for a PCP deal online for free, without impacting your credit score. This is a good way to find out whether it’s the right type of car finance for you before applying for car finance. Otherwise you risk negatively affecting your credit score by going straight to the ‘hard search’ from the lender.
You’ll need to be mindful of how many miles you’re driving when you take out a PCP agreement on a car. If your total mileage is above what you originally agreed with the lender, you’ll be charged a rate per mile. How much this is will depend on who you’re financing the car with, but average charges are between 4p and 10p per mile. This can rise to as much as 70p per mile on more premium cars.
Your excess mileage charge will be stated in your contract when you order your car. Don’t worry too much if your circumstances change mid-contract and you find yourself doing more miles than originally agreed. Most lenders will understand that things change and can add more mileage to your agreement. They will re-quote your monthly payments accordingly.
If you want to cancel your PCP agreement early you’ll need to have paid 50% of your total finance. This includes any tax, fees and, crucially, the balloon payment at the end. For this reason it can be expensive to cancel your PCP deal early.
Before you decide to take this route, make sure you can afford to make up the difference between the amount paid and the 50% mark. Unfortunately, if you’ve paid more than 50% of your total PCP finance and want to cancel, you won’t be refunded for any extra you’ve paid.
PCP isn’t the only form of car finance out there, and depending on your individual needs and budget you may want to consider other options.
The other main forms of car finance include Hire Purchase (HP), car leasing (also known as Personal Contract Hire, or PCH) and a personal loan.
See our summaries of each finance method below to help you decide which option is right for you.
A HP agreement is designed for people who want to own their cars. A deposit payment is required initially (usually around 10% of the car’s value), followed by fixed monthly payments that cover the cost of the entire vehicle. If you want to own the car at the end, you’ll need to pay a small ‘option to purchase’ fee of around £100-£200. Otherwise you can decide to hand the car back with nothing more to pay.
PCH (or car leasing as it’s more commonly known) is a form of long-term rental whereby you pay fixed monthly payments for a brand-new car. Unlike the other forms of car finance, you won’t have the option to own the car at the end.
In terms of payment structure, you’ll pay an upfront fee of your choosing to a finance provider that owns the vehicle. The remaining monthly payments will be based on the depreciation of the car over your term (i.e. contract length and annual mileage).
Fed up with searching for the best deal? Moneyshake finds you the best car lease deals, simplifying your search for a brand-new vehicle.
A personal car loan is one of the more traditional methods of financing your car. It works like a cash purchase where you borrow the money needed for the car from a bank or building society. You then agree to repay the bank/building society over 1-7 years with added interest decided from the beginning.
Want to find out more about car finance and leasing? Head over to our guides page for answers to all your finance FAQs.
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