How is PCP Car Finance Calculated?

Are you thinking of getting car finance to buy a car? Have you heard the term PCP but don't really know what it involves, or what does PCP actually mean? 🤔 One of the common ways of financing a car is through a Personal Contract Purchase. You might be wondering how it works and what you should expect from this type of car finance. Read on because we’ve got you covered. Here, we’ll discuss its key points and also answer questions like, “how is PCP car finance calculated?” Let’s begin!

PCP Car Finance: How Does It Work?

To start, PCP stands for Personal Contract Purchase and it’s a common type of car finance that’s popular with a lot of UK drivers. Typically, there are three elements that comprise a PCP deal, namely the deposit you pay upfront, the monthly repayments, and the optional final payment which is also called the balloon payment

Many drivers like PCP car finance UK because of its flexibility. There are car finance companies that offer zero-deposit deals, making it possible for you to drive home a car without putting down any cash. Also, you have a number of options on what to do with the car when your contract comes to an end. 

The first option is to take ownership of the car by paying the optional balloon payment. Once you pay that off, the car will be yours. The second option is to simply return the car to the lender and not pay anything else. And lastly, you can use the remaining equity of the car towards the deposit you need for a new car. 

If you’re not sure about owning a vehicle just yet, a PCP car finance agreement is the best choice for you. You get to enjoy the freedom and convenience of having your own ride and you don’t have to decide immediately about what you want to do with it. When you’re nearing the end of the car finance agreement, then you can start weighing your options to see which one suits you best.

How is the Balloon Payment Calculated?

The optional final payment in a PCP car finance deal is also called the balloon payment. It is the final lump sum that you need to pay if you’ve decided that you want to own the car at the end of your PCP agreement. 

The way a balloon payment works is that the amount is already determined at the start of the agreement and it is stated in your contract with the lender. For a car that had a price tag of £20,000, it might only be worth £8,000 by the time a three-year PCP car finance agreement ends. 

The monthly payments you make for the car don’t actually cover the full price of the vehicle, instead, they go toward the predicted depreciation of the car. So, with the car’s value being £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.  

To know the estimates of the cost of buying a car on PCP finance, try using a PCP car finance payment calculator. These calculators are readily available on the websites of many car finance companies. A quick search online will show you thousands of results instantly. Be sure to use them so you can have a good idea of how much you need to prepare if you were to get a car through PCP financing. 

HP vs. PCP Car Finance Comparison

Apart from Personal Contract Purchase, the other popular type of car finance is Hire Purchase. They are similar in many ways such as putting down money for your deposit and making repayments every month. The main difference between HP and PCP is that with HP, your monthly repayments go toward the price of the car. This means once you’re done making monthly payments, the car will be yours. As mentioned earlier, a PCP deal requires you to pay the balloon payment before you can own the car. 

So, between HP and PCP, which one is better? The answer to this question depends on your preference and financial situation. For example, if you’re not sure yet about owning a car or maybe you only need a car for a couple of years, then a PCP deal is the better choice for you. On the other hand, if you don’t mind paying a higher monthly repayment amount and you want to own the car at the end of the agreement, then a Hire Purchase deal is the way to go. 

How to Get a Good PCP Deal

To make sure you have the most suitable PCP deal, make sure that you do your research and shop around. There are so many car finance companies in the UK that are ready to make an offer. Whether you have an excellent credit score or a poor rating, there’s sure to be a lender that can help. 

However, if you want to be offered the lowest interest rates, consider working on your credit score first if it’s on the lower end because lenders rely heavily on the borrower’s credit score when deciding on the interest rate they’ll charge. This is because the credit score represents your creditworthiness and whether you’re a low-risk or high-risk borrower. So, be on the safe side and boost your credit score before applying for car finance. 


Now that you have an idea of how PCP car finance is calculated, you’ll be more confident to shop around. Car finance companies advertise a representative annual percentage rate but bear in mind that it might not be the actual rate that they’ll offer you.

Before signing any PCP car finance deal, be sure to read and understand everything on the contract. If there are terms that are not clear, don’t hesitate to ask the car finance company’s representative. You might also want to check this guide on car finance jargon so you’ll be more familiar with it! 👍