A Complete Guide to PCP Car Finance

PCP, or personal contract purchase, is amongst the most popular ways drivers buy their vehicles. It's a type of finance that allows you to spread the cost over an agreed period and make a final balloon payment at the end of the contract. At this point, the car is entirely under your ownership. PCP options also tend to have lower monthly payments than other forms of finance, like hire-purchase. Plus, you don't have to commit to making the balloon payment –- you can give the car back to the dealer or sell the car earlier as long as you cover the outstanding finance. 

So, is PCP car finance the right option for you? Before deciding, check out this guide which has everything you need to know about buying a car using a personal contract purchase. 

What does PCP mean in car finance?

PCP stands for personal contract purchase and sees you paying a deposit for a new or used vehicle and making monthly repayments for the agreed period. Once the contract comes to an end, you have the option of making a balloon payment, which gives you full ownership of the vehicle. This payment is calculated by the predicted car depreciation over the length of the contract, meaning the balloon payment is set at the suggested depreciated amount. 

Find out more about what PCP actually means

How does PCP car finance work?

Personal contract purchase (PCP) is a type of car finance similar to getting a personal loan to buy a car. You make the purchase but won't have to pay for the vehicle with cash upfront. Instead, you typically pay a deposit and a series of monthly payments throughout your contract. The critical difference between PCP and a personal loan – or even a hire-purchase deal – is that with PCP, the monthly payments don't go towards the car's total price but to its predicted depreciation. That's why PCP monthly payments are lower than HP. 

Learn more about how PCP car finance works

How is PCP car finance calculated?

With PCP, you can have a balloon payment at the end of the contract. A balloon payment works because the amount is already determined at the start of the agreement, and it is stated in your contract with the lender. 

The monthly payments for the car don't actually cover the full price of the vehicle, instead, they go toward the predicted depreciation of the car. So, if the car's value is £8,000 by the end of your contract, that's the balloon payment you'd have to pay to own the car you've been driving. You need to pay this figure to secure 100% ownership of the vehicle.  

Find out more about how PCP car finance is calculated

How do I find the best PCP car finance deal?

Plenty of lenders offer PCP finance, including automakers and garages. Therefore, you'll want to find the best option for your car-buying needs before settling on finance. One way to do that involves having a good credit score – the higher your rating, the lower the interest rates. If you have a good rating, it means your monthly payments will be lower. You can also compare PCP finance deals by checking the monthly repayment amount, the car's age and the deal's specifics.

Find out more about the best PCP car finance deals

Should I get PCP or a lease?

With PCP, you pay a deposit upfront and make regular monthly payments until the balloon payment is due. At this point, you can either purchase the rest of the car or hand the keys back to the dealership. With a lease, however, you don't have the option of buying the car at the end of the term – you need to give the vehicle back to the garage. Your choice largely depends on what you want from your car finance. Car leasing only tends to be available for new cars.

Find out more about whether you should get PCP or a lease

Can you get out of PCP car finance?

PCP car finance sees you making regular monthly payments before a final balloon payment to buy the vehicle. If, however, you wish to exit your PCP car finance agreement before the balloon payment stage, options are available. You can enter into a voluntary agreement, which you can do if 50% of the car has already been paid. Alternatively, you can ask for an early settlement and repay the remaining balance in full. 

Find out more about if you can get out of a PCP car finance agreement. 

Can you get PCP on used cars?

Many people associate PCP with brand-new cars, but you can also get it on used vehicles. Essentially, it depends on what the finance lender offers. PCP can deliver an affordable way for you to buy a car with the option of a final balloon payment that would see you the outright owner of the vehicle. 

Find out more about getting PCP with used cars

Is servicing included in PCP finance? 

PCP can offer an alternative for a driver to get finance on their car, but it doesn't typically involve servicing. You would need to cover the servicing charges out of your own pocket, which means factoring in potential servicing costs before buying the vehicle. If, however, it's a new car, you probably won't need to service it for around three years or until you reach 20,000 miles. 

Find out more about servicing and PCP finance

What can I do with my car on PCP?

There may be some limits to what you can do with your car, depending on the type of PCP agreement. These may include mileage limits, where you're charged per mile if you exceed the allocated amount. The lower the mileage limit, the less you pay in monthly payments. Other factors worth considering include whether you can sell the car while owing PCP (but you'll need to clear the finance owed) and modifications. Some drivers like to modify their vehicles, but most PCP contracts don't allow you to do so. 

Find out more about what you can do with your car on PCP

What are the advantages and disadvantages of PCP finance?

There are several advantages to buying a car with PCP finance. These include being able to upgrade your vehicle every few years thanks to flexible terms and cheaper monthly payments than other finance types, thanks to costs going towards predicted depreciation. Beyond that, PCP usually requires smaller deposits, and there are flexible options when the loan ends, such as making a balloon payment. However, there is also a drawback. 

Are you wondering what the negatives of PCP are? Most PCP deals have annual mileage limits; you'll need to pay more if you exceed the amount. At the end of the contract, there may also be penalties if the damage goes beyond fair wear and tear. 

Find out more about the advantages and disadvantages of PCP finance

That's a Wrap!

By now, you should have a pretty good idea of what PCP financing is and what it does and doesn't involve. While it can be a good option for some drivers, it isn't suitable for everyone. If you’re wondering “Is PCP better than a loan for a car?” The answer is it depends on what you want. With a PCP you’ll typically get higher discounts and deposit contributions, alongside more flexible repayment terms. 

At Carmoola, we don't currently offer PCP finance. However, we do provide other affordable car finance options. Learn more about our car finance options, or calculate your budget now. Best of all – seeing how much you could borrow won't harm your credit score.