Considering PCP finance? If you’re weighing up your car finance options and keen to understand whether PCP is the best choice for you, you’ll need to know how it all works.
That’s why we’re here; we’ll help you get all the facts you need to make an informed decision and get you back on the road in your new wheels in next to no time.
Got a specific question? Why not jump to:
Personal Contract Purchase – or PCP for short – is a type of car finance that spreads the cost of buying a new or used car over a set period.
PCP deals typically last between two and four years, but at the end of the loan, you have options: you can choose to buy the car with a one-off balloon payment, hand it back to the lender and walk away, or use any available positive equity as a deposit in a new agreement.
This flexibility, as well as the relatively low monthly repayments that can come with PCP, have seen this type of agreement becoming much more popular in recent years.
PCP finance is broken down into three stages:
Most PCP will ask you to put a deposit down upfront. The amount is up to you (and how much you can afford) but around 10% of the car’s purchase price is usually considered a decent deposit.
Next, you’ll make fixed monthly payments throughout the loan term. These payments will be calculated so they cover the difference between your new car’s current price and its estimated future value, usually called the Guaranteed Minimum Future Value or GMFV. As you don’t have to cover the full purchase amount, your payments can be lower than other finance options like Hire Purchase (HP).
If you’ve fallen head over heels for your new wheels, you have the option to buy it and become its official owner at the end of the agreement. But first, you’ll need to pay the one-off lump sum known as the balloon payment. This is the amount outstanding on the loan and usually equivalent to the GMFV. If you can’t afford to pay it all in one go, don’t worry; refinancing loans are available.
Don't fancy committing to a long-term relationship with your vehicle? At this point you can always hand it back and walk away, or use any positive equity you've built up as a deposit in a new agreement.
Let’s look at an example:
Sounds good so far? If you think PCP might be the right choice for you, our need-to-know feature rundown could help you make up your mind:
Every finance option has its upsides and downsides; here are a few of the advantages and disadvantages of PCP finance that it’s worth keeping in mind:
One of the big benefits of PCP finance is that it gives you options and flexibility in case you change your mind or if your circumstances changes. In fact, you have three options when you reach the end of your PCP agreement:
Ready for a change? If you’ve had a change in circumstances or you’re just bored of driving the same old thing, you can simply hand the car back to the lender.
You’ll need to let them know, preferably in writing, as you approach the loan term end date as they’ll need to arrange an inspection and a collection or drop off point.
Assuming you’ve treated your car with a little TLC to keep it in good condition and not gone over your annual mileage limit, you’ll be able to hand over the keys and walk away.
If your car is worth more than expected (its value exceeds its GMFV) then you’ll be in positive equity. This can give you even more choice as you might be able to use that extra value as a deposit and buy a new car on finance.
Whether or not you’ll be charged when you return a car on PCP finance will depend on how well you’ve looked after it during the loan term. The car legally belongs to the lender, after all, so it’s understandable that they’d be concerned that you’ve kept it in good condition (and helped it maintain as much value as possible!)
The lender will usually arrange a vehicle inspection before the agreement officially ends. Fair wear and tear is expected – think a few small scuffs on the upholstery or scratches on the bodywork – but any more serious damage might lead to extra charges. Depending on the terms and conditions of your agreement, it might be cheaper for you to arrange the repairs yourself at an approved local garage before the inspection date.
If you’ve gone over your mileage limit, you’ll likely have to pay extra too. The exact charge will be listed on your agreement, but it’ll typically be per mile.
Let’s face it; life doesn’t always go smoothly. While a finance agreement is a legally binding contract, if your circumstances have changed, positively or negatively, and you need to end your PCP agreement early, there are options available:
The Consumer Credit Act 1974 gives you peace of mind when taking out car finance with a "cooling-off" period. If you change your mind after agreeing to a hire purchase deal, you have 14 days from the agreement or receiving a copy (whichever is later) to cancel without penalty.
You can settle your finance at any time by requesting a settlement figure from your lender. This will usually be made up of any remaining payments, minus future interest, plus your final balloon payment. Once this amount is paid, congratulations – the car is officially all yours. Be aware that an early termination charge might also apply.
If you’re struggling to keep up with your payments or no longer need a car, under the Consumer Credit Act 1974 you have the right to voluntarily terminate your finance agreement. You just need to tell the lender you want to voluntarily terminate and return the car. It is important to note you will need to pay 50% of the total amount payable (including the balloon payment). If you’ve made some payments but not yet reached this point, you will need to pay the difference and if you’ve already paid over 50%, you can return the car without needing to pay any more money. Extra charges might apply if the car is damaged beyond fair wear and tear.
There’s no right or wrong answer when it comes to choosing a finance deal; the best option for you will depend on your personal preferences, priorities, and financial situation.
PCP finance could be the right choice for you if: