Personal Contract Purchase (PCP) is a form of loan to help you buy a car. However, the amount you borrow is based on how much value the finance company predicts the vehicle will lose over your term (usually 24-60 months).

Want to find out more about PCP and if it’s the right car finance option for you? Discover how this popular car finance method works in our handy guide.

How does PCP work?

Before starting any PCP car finance agreement, first you’ll need to pass a credit check to show the finance company that you can afford the monthly repayments. It’s a good idea to find out what your score is in advance too. You can do this for free using a credit score checker such as ClearScore.

There are three main things to consider as part of a PCP deal:

  1. The deposit: this is usually around 10% of the value of the car, but you can choose to pay as much or as little upfront as you like. But remember, the more you can put towards the deposit for the car, the lower your monthly payments will be.
  2. Loan repayments: PCP car finance monthly payments are based on what the finance company deems the vehicle will be worth after the term that you have it, plus your annual mileage. This is known as the Guaranteed Minimum Future Value (GMFV).
  3. Balloon payment: a lump sum that you have the option to pay for at the end of your PCP deal if you want to own the car afterwards.

What PCP finance could look like

Imagine that you want to finance a car that’s worth £15,000 over three years. The finance company calculates that the car will be worth £6,000 after the three years.

This is how your payments are likely look using a PCP agreement with this term:

  • Your deposit would typically be around 10%, so in this case you’d pay £1,500.
  • You’ll then owe £13,500. However, because the car is expected to be worth £6,000 at the end, you only need to repay £7,500 (plus interest on the £13,500) over three years.
  • When you get to the end of your agreement, you can pay the £6,000 if you want to own the vehicle, or hand it back to the finance provider (providing it’s not damaged and you’ve stuck to your mileage limit).

Remember: even if you hand the car back, you’ll still pay interest on the whole £13,500 loan amount.

How much are cars on PCP finance?

The monthly cost of financing a car on PCP depends on a number of factors, including:

  • The type of car you choose: choosing a bigger, more luxurious model will make the monthly finance payments higher than a smaller hatchback, for example.
  • Your chosen term: a longer contract and lower annual mileage will make your repayments cheaper, while a shorter contract and higher annual mileage will be more expensive.
  • Whether the car is new or used: getting a used car on a PCP deal can make monthly payments cheaper than choosing a brand-new model. However, it’s worth comparing both as manufacturers tend to offer incentives like deposit contributions and reduced interest rates.
  • Your credit score: finance providers will charge added interest on monthly payments for the car if you don’t have a good credit, or existing CCJs (County Court Judgements) on your credit profile.

Should I choose PCP for my next car?

Take a look at our handy table below comparing the advantages and disadvantages of PCP agreements before making your decision.

Flexibility. Choose whether you want to own the car at the end, use any positive equity as a deposit for your next vehicle, or simply walk away with nothing more to pay. If you decide to do the latter, you’ll need to make sure that you’ve stuck to your mileage limit and that there’s no damage to the car. Otherwise you’ll face additional charges.The optional balloon payment can be expensive. This lump sum to own the car can be up to 55% of its value at the start of your agreement. Paying this in one go can be a big ask for most people. So, you should consider saving up in advance if you plan on owning the vehicle.
Low monthly payments. One of the main reasons that PCP finance is popular with drivers is because the repayments on the loan are generally affordable. Manufacturer dealers can offer exclusive discounts on their vehicles. Used cars are also available, which can also mean lower monthly payments.You’re limited on how far you can drive the car. PCP deals require you to select a limit for the number of miles you drive each year. This is usually between 6,000-30,000 miles. If you go over your total mileage, the finance provider will charge you extra at a rate per mile. Depending on the provider and vehicle, this can be anywhere from 4p-72p per mile.
Low deposit options. A typical deposit for a PCP deal is 10% of the car’s current value. But you can choose to put down as much or as little as you like in order to make the monthly payments more affordable.You can be charged for damage if you don’t look after the car. It’s important that you keep the car in a condition which reflects fair use. For example, scratches up to 25mm, or dents up to 10mm, are deemed as normal. Any damage which goes beyond this is likely to lead to extra charges at the end.
Manufacturer discounts available. Manufacturers’ own finance arms (Ford Credit, Volkswagen Financial Services etc.) can offer you low APR rates and deposit contributions that will make financing your new car more affordable than other forms of finance.If you don’t want to own the car, there may be better finance options out there. While PCP deals offer some of the lowest monthly payments of any finance agreement, the lump sum to own it puts many people off choosing this option. If you don’t plan on owning a car, you’re likely to get more value from choosing a lease deal. The monthly payments are often similar, and you’ll have peace of mind in knowing that the car is brand new.

Where should I go to get the best deal?

You can finance your car through a PCP agreement using a manufacturer dealer, or through third-party providers, such as banks and brokers.

There’s no one right place where you should go to get your car financed. In order to get the best deal, you should compare finance quotes from dealerships and third-party providers.

If you have a manufacturer in mind when choosing your next car, you could benefit from special discounts by choosing PCP dealership finance. Because they’re backed by their own finance arms, you can get exclusive offers such as money towards your deposit and lower interest rates. Both of which can make the monthly payments for the car more affordable.

On the other hand, brokers are able to supply finance through a multitude of lenders. So, even if you don’t have a good to excellent credit score, a broker could still find you a suitable finance agreement for your car. What’s more is that they won’t be limited to offering cars from just one manufacturer, like a dealership would. You’ll be able to find PCP agreements for most manufacturers and models.

What happens at the end of a PCP agreement?

PCP deals are a good choice if you want flexibility at the end of your contract. Despite it being called Personal Contract Purchase, you don’t have to own the car at the end. This is just one of three options.

As long as you’ve kept the car in good condition and not gone over your agreed mileage limit, you can hand the car back with nothing more to pay.

If you plan on owning the car after your agreement, you’ll need to pay the final balloon payment. This will be a fixed sum that your finance provider will calculate at the beginning of your contract You also have the option to refinance the balloon payment (i.e. take out a personal loan in order to cover the lump sum at the end).

Taking out a personal loan to cover the balloon payment means you will lose some rights under the Consumer Credit Act (CCA) and Voluntary Termination (VT) clause in your contract. Namely, you won’t be able to hand the car back at the end of your term, or exercise your right to VT.

Perhaps you don’t want to hand the car back or own it, but instead want to upgrade to a newer model? The way a PCP deal works and the finance is calculated, you will most likely have positive equity (i.e. the car is worth more than the GMFV set out at the beginning).

In this instance, the extra cash can be used towards the deposit of your next finance agreement on your new car. Even if you want to get your next car from another manufacturer or dealer, you should still be able to part-exchange your old car. The dealer will pay off the remaining finance and sell your vehicle.

Can I cancel my PCP or car finance agreement early?

As long as you’ve paid 50% of the total finance on your PCP (including the balloon payment, plus any damage or excess mileage costs), you can cancel your agreement.

This is what’s known as voluntary termination.

It’s often thought that you can end your finance agreement once you’re halfway throughout it, but this isn’t true. The same applies to Hire Purchase (HP) finance deals too.

Are there any extra costs I should be aware of?

Before you hand your car back to the finance provider, you need to be aware of potential charges at the end of your PCP agreement.

There are only two reasons why you would face extra costs during a PCP deal. These are:

  • Excess damage – the finance company won’t expect you to keep the car in showroom condition, but they will expect its condition to reflect the age and mileage of your term.
  • Excess mileage – it’s important that you keep within the agreed annual mileage limit set out at the beginning of your PCP agreement. Finance providers will charge at a rate per mile for every mile you’re over this limit, which can soon add up if you don’t keep on top of it.

For more information on car finance and leasing, head over to our guides page.