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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 too sure they want to own one. This is where PCP car finance comes in. With this type of car financing, you get to have a car to drive and also have flexible options to choose from at the end of your contract. You may buy it, return it, or use its remaining equity to finance another car. Let’s learn more about how PCP car finance works!

Is PCP Car Finance a Good Idea?

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

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

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.  A Personal Contract Purchase deal is a good idea because you get to have options on what you want to do with the car. 

How Does PCP Car Finance Work?

Personal Contract Purchase is a type of car finance that is similar to getting a personal loan to buy a car. You get to make the purchase but you won’t have to pay for the car with cash up front. Instead, you would usually pay a deposit, and then a series of monthly payments throughout your contract. 

The key difference between PCP and a personal loan or even a Hire Purchase deal is that with PCP, your monthly payments don’t go towards the full price of the car but to its predicted depreciation. That’s why PCP monthly payments are lower than HP. So do consider this if you're not sure whether to opt for  HP or PCP car finance.

When you get a PCP deal, you'll be expected to put a deposit of 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 which is usually between 24-60 months. 

The amount you pay every month is based on the interest rate and the predicted depreciation of the car, and therefore it's 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 the 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. 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 normally 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 value of the car had 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 upfront, and then repay your debt plus the interest on a monthly instalment until your term is completed.

Depending on the type of finance agreement you select, the amount you pay and your choices available at the end of your term will differ. With HP, your monthly instalments go toward the whole price of the car. When you’re done making all payments, the ownership of the car 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 you’re not sure yet if you want to own the car. 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 who are looking for a low rate car finance option might go for a PCP deal.

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

There are three options available to you at the end of your PCP car finance agreement. You can purchase the car by paying a balloon payment. When you do this, the ownership of the car will be transferred to you. Many lenders have a clause in their terms and conditions about a one-time fee that you need to pay along with the balloon payment. Be sure to check your contract to know if there are other fees you need to settle. Always make sure you know exactly what the rules are for what you can and can't do if you take out a PCP deal - read more about that here

You may also just 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 equity of the car as a deposit for your next car if you want to get another PCP agreement. Instead of paying with cash for the deposit, you will use the remaining equity of your old vehicle. 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 find out more about how to compare the PCP deals on offer click here.

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