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Personal Contract Purchase: Car Finance Jargon Busters

Do you want to drive a new car but you’re not yet sure if you want to own it? 🤔 Maybe you just need it for a couple of years or you’re not really set on buying a car but would love the convenience of having your own set of wheels. If you’re in this situation, then you might consider getting a PCP deal with a car finance company. 

What is a PCP Car Finance Deal?

So, what is PCP car finance and what does PCP stand for in car finance? It means Personal Contract Purchase. With this arrangement, it’s like you’re renting a car long term, say three years. You’ll be paying for it every month throughout your contract with the car finance company. 

By the end of your contract, you’ll be given a set of options to choose from. You may return the car, pay the optional balloon payment so that you’ll own it, or you may use the car’s resale value in financing another car. It’s a flexible car finance product for drivers who are not yet sure if they want to own the car but would want the freedom of having a car to drive.

What to Know About PCP Deals

Before signing a PCP contract, here’s what you need to know about this type of car finance. Typically, a PCP agreement lasts between three to five years. In the same way that you need to pay a deposit at the start of your Hire Purchase agreement, you’ll also do this if you’re financing a car with a PCP deal. 

The car isn’t yours when the contract ends like with HP deals. Instead, you will be given the option to pay an optional final payment called “balloon payment” so that the ownership of the car will be transferred to you. 

If you don’t want to own the car, then you can simply return it to the car finance company and walk away. However, if you’ve exceeded the mileage limit or if there’s damage to the car beyond the usual wear and tear, you may have to pay certain charges. 

Lastly, if you want a new car, you can use the remaining equity of your old car as your deposit for a new PCP deal with the car finance company. You won’t have to worry about paying a deposit since you’ll be using the equity of the car for that. If the equity of your old car is not enough for the deposit, then you’d only need to add by paying with cash. 

Usually, car finance companies rely on your credit score when setting the interest they’ll be charging for your PCP arrangement. You may get in touch with the lender to get a car finance quote for a PCP deal. You may also use a car finance calculator to get an estimate of the cost of financing a car. 

Difference Between PCP and HP Car Finance

If you want to compare PCP car finance with HP finance - what are the differences and similarities?

Similarities

Let’s start with the similarities between these two types of car finance products. The first one is that you get to have a new car without having to pay the full price in cash. With these two car finance deals, you only need to prepare the deposit which you’ll pay upfront and then the monthly instalments you’ll be paying throughout the length of your contract. PCP and HP car finance are great ways to have a car without using up most of your cash because the cost of the vehicle is spread into affordable monthly repayments. 

Differences

Now that we know how these two car finance types are the same, let’s go to their differences. With HP, you’ll pay monthly instalments which are typically higher than what you’d pay for a PCP deal. However, the good thing about this arrangement is that by the end of your contract when you’ve made all the repayments to the car finance company, the car will be yours. 

With a PCP deal, the monthly repayment amount will be lower than HP instalments. But unlike HP deals, you won’t own the car at the end of your contract with the car finance company. Instead, they’ll give you the option to pay the optional balloon payment. 

If you want to own the car, then you only have to make the final payment. If you don’t want to do that, then the simplest option is to hand back the vehicle to the car finance company. The third option is to exchange the car for another with a new PCP deal. 

It’s important to remember that the car that’s financed through PCP needs to still be in good condition by the time your contract ends. There’s usually a mileage limit that you need to follow, otherwise, you would have to pay a charge for that. Of course, you also need to take good care of the car because any damage beyond the usual wear and tear would also mean extra charges. Avoid this by making sure the car is well-maintained throughout the time you’re using it. 

How to Compare PCP Car Finance Deals

Before signing a PCP arrangement, you’d want to make sure that it’s the best deal for you. Shop around first and get a car finance quote for a PCP deal, so you’ll know what car finance companies are actually offering. To make things simpler and faster, you might want to check out online comparison websites so you’ll see different PCP deals at a glance. Your monthly payments will also be affected by the residual value of the car at the end of the term - so do shop around and compare for different brands and models. 

Check the Annual Percentage Rates (APRs) on the PCP deals, not just the interest rate. APRs include other fees so comparing different APRs from various car finance companies will allow you to better gauge which one’s the best. 

You may also want to compare deals between new cars and used cars. Of course, you’ll find that used PCP car finance deals are more affordable. If you’re on a tight budget, you can still enjoy having a car to drive if you choose a secondhand vehicle. There might even be nearly-new cars or ex-demonstrator cars that are essentially as good as a brand new car. 

Takeaway

When choosing a PCP deal, be sure to do some research and compare different deals first. And do bear in mind when you see the lower payments that the car won't be yours to keep unless you can pay the final balloon payment, which can be quite substantial. Also, don’t hesitate to ask a representative of the car finance company if you have any questions or if there are things you want to clarify about their PCP deal. There can be slight differences in contracts from lender to lender. Once you’ve found the right car finance company with a good offer, you’re only a few steps away from having a car to drive! Now that is exciting! 😃🚘

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