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.

Benefits of PCP

1. Low monthly payments

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:

  • The monthly payments go towards the depreciation of the vehicle over your term (i.e. contract length and annual mileage), not the full value of the car
  • Low interest rates are available if you shop around dealerships, third party lenders and car supermarkets
  • Used cars available on PCP which slash prices further thanks to these cars not losing their value as quick as new models

2. You don't have to own the car

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.

  1. Return the car and walk away with nothing more to pay – you’ll need to make sure it’s in good condition and you’ve stuck to your agreed annual mileage
  2. Use any positive equity you have in the car towards a deposit for your next model on separate PCP deal

3. Manufacturer discounts available

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.

4. Choose between used and new cars

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.

5. Flexible loan terms

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.

Disadvantages of PCP

1. Balloon payment can be expensive

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.

2. Damage charges apply for excessive wear and tear

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.

3. Interest rates are high if you have bad credit

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.

4. Extra charges if you go over mileage cap

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.

5. Cancelling your agreement early can be expensive

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.

Alternatives to PCP

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.

Hire Purchase

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.

Advantages of HP

  • You won’t be restricted by mileage because repayments aren’t based on depreciation of the car over a number of miles
  • Small ‘option to purchase’ fee mean that it’s affordable to own the car at the end
  • Interest rates are fixed so you won’t have to worry about the price of your monthly repayments changing
  • Often easier to cancel your agreement early if you need to because you’re paying off more of the car each month

Disadvantages of HP

  • Monthly payments tend to be the highest of any car finance method
  • The loan is secured against the car, so it can be repossessed if you fall behind on your monthly payments
  • Personal loan interest rates can sometimes be better than Hire Purchase ones

Personal Contract Hire (PCH)

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).

Advantages of PCH

  • All the cars are brand-new and include the manufacturer’s warranty
  • Fixed monthly payments aren’t affected by interest rates
  • Option to include maintenance for wear and tear items
  • Ideal if you want to drive the latest cars every few years

Disadvantages of PCH

  • You won’t have the option to own the car at the end
  • Bad credit applications are generally not considered by leasing funders
  • You’ll have to pay an expensive early termination fee if you want to cancel your agreement early
  • Because you don’t own the car you’re limited by mileage and can’t make modifications without the funder’s permission

Fed up with searching for the best deal? Moneyshake finds you the best car lease deals, simplifying your search for a brand-new vehicle.

Personal loan

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.

Advantages of a personal loan

  • Often some of the lowest interest rates among car finance methods
  • Easy to arrange and less complex than other forms of car finance
  • You own the car the minute you transfer the cash to the seller
  • Personal loans can be taken out to buy a car from a dealership or private seller

Disadvantages of a personal loan

  • If you don’t have a good to excellent credit score, you may not be approved for a personal car loan
  • Because you own the car straight away, you’ll be responsible for paying any repairs
  • Depreciation means that the car won’t be worth what you paid for it when you come to sell it
  • A longer loan term might lower your monthly payments, but you’ll end up paying more in interest

Want to find out more about car finance and leasing? Head over to our guides page for answers to all your finance FAQs.