How Does PCP Car Finance Work?

Most of us want to enjoy the freedom of having our own ride. For some, buying a car is a big financial commitment, and they're not sure they want to own one immediately. That is where PCP car finance comes in. With this type of car financing, you get to have a car to drive and flexible options at the end of your contract. You may buy, return, or use its remaining equity to finance another vehicle. Ready to learn more? Let's delve into how PCP car finance works…

Is PCP Car Finance a Good Idea?

A Personal Contract Purchase deal is a good idea because you have options on what you want to do with the car. You may also choose to pay the optional balloon payment so that the ownership of the vehicle can be transferred to you. The last option is to use the equity of your old car as a deposit for another car. 

If it's your first time financing a car, borrowing a substantial amount of money for the purchase may seem intimidating. But this isn't something you should worry about, especially when you know you're responsible when handling your finances. With car finance, you can get a car without using up all your cash to buy it. But is PCP a good way to finance a car?

Many drivers choose PCP deals as an affordable way to get a car. At the start of your PCP contract, you usually have to pay a deposit. After that, you only have to think about the monthly repayments for the duration of your car finance agreement. You may return the car at the end of your contract and not pay anything else. 

How Does PCP Car Finance Work?

Personal Contract Purchase is a type of car finance similar to getting a personal loan to buy a car. You can purchase but won't have to pay for the vehicle with cash upfront. Instead, you would usually pay a deposit and a series of monthly payments throughout your contract. 

So is car finance the same as a loan? The critical difference between PCP and a personal loan or even a Hire Purchase deal is that with PCP car finance, your 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. So consider this if you're unsure whether to opt for HP or PCP car finance.

When you get a PCP deal, you must deposit roughly 10% of the car's value at the beginning of your agreement. You'll pay fixed monthly payments on your loan balance for the duration of your term, usually between 24-60 months. 

The monthly amount is calculated on the interest rate and predicted depreciation, alongside its residual value at the end of the term. So your monthly payments will cover the difference between the initial price of the car and its future value. 

What are the PCP Charges to Expect?

What are PCP fees, and how are they determined? Mileage and damage are the two basic charges to be aware of when signing a PCP deal. When you sign up for a PCP, you agree on an annual mileage  allotment based on your anticipated driving range. If you exceed the agreed-upon mileage limit, you will almost certainly be charged an excess mileage fee for each additional mile when you return the car. 

It's a good idea to check out exactly how much you'll be charged before signing up for a PCP plan because if your circumstances change and you drive more miles than allowed, you could be hit with a huge payment when you return the car.

As for damage beyond the usual wear and tear, your PCP contract will typically state how often you must service the vehicle and in what condition you must return it. If you fail to service the car as scheduled, or worst, none at all, you can expect to have to pay additional fees because the car's value was directly affected by this kind of neglect. 

HP or PCP Car Finance: Which is Better?

The two common types of car financing agreements are Personal Contract Purchase and Hire Purchase. With car finance, you're borrowing money from a lender to buy a car. You'll need to pay a deposit and repay your debt, plus the interest on a monthly instalment until your term is completed.

The amount you pay and your choices available at the end of your term will differ depending on the type of finance agreement you select. With HP, your monthly instalments go toward the car's total price. When you're done making all payments, the car's ownership will be transferred to you. 

PCP monthly payments are much lower because they will only cover the predicted depreciation of the car. This is a better choice if you want a more affordable option and are not sure yet if you want to own the vehicle. You can decide about that when you're nearing the end of your contract and check if the balloon payment is one you're willing to pay for to own the vehicle. People looking for a low-rate car finance option might choose a PCP deal.

What are My Options at the End of a PCP Deal?

Three options are available at the end of your PCP car finance agreement. The first is you can purchase the car by paying a balloon payment. When you do this, the car's ownership will be transferred to you. Many lenders have a clause in their terms and conditions about a one-time fee you must pay along with the balloon payment. Be sure to check your contract to know if there are other fees you need to settle. Always ensure you know the rules for what you can and can't do if you take out a PCP deal. You can learn about some of the general rules in our PCP car finance rules blog.  

The second option is to return the car at the end of your contract and walk away. Typically, you won't have to pay anything else, but if you exceeded the pre-agreed annual mileage limit, you'd have to settle the charges. Any damage to the car beyond fair wear and tear also means additional penalties. 

Lastly,  you can use the car's equity as a deposit for your next vehicle to get another PCP agreement. Instead of paying with cash for the deposit, you will use the remaining equity of your old car. If it's not enough to cover the 10% deposit, at least you will only be adding a fraction of the cost. 

If you want to learn more about how to compare the PCP deals on offer, check out our blog on how to find the best PCP finance deals

We get it – getting car finance can be scary, but it doesn't have to be. Following our in-depth guides included on the blog, you can make the best choice to suit your circumstances.