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What is PCP? A Complete Guide to PCP Car Finance

Heard about PCP Car Finance but not sure what it involves? Our complete guide to PCP will help you decide if it’s the right finance option for you

Verity Hogan
Written by Verity Hogan
Edited on
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What is PCP?

So, you’ve found the perfect car already? Or maybe you want to find out how much you can spend first?

Either way, the term PCP has probably already started popping up in your Google searches.

But what does it mean?

PCP is short for personal contract purchase – it’s a flexible car finance option that’s become more popular in recent years.

If you choose a PCP agreement, you’ll usually pay a deposit, followed by fixed monthly payments, but you won’t automatically own the car when the agreement ends.

Instead, you can return it to the dealer (as long as you’ve taken good care of it) or choose to buy it with a one-off balloon payment.

The amount you’ll pay every month will depend on the size of your deposit, the cost of the car, the interest rate, and how much the lender expects the car to be worth at the end of the agreement (known as the Guaranteed Minimum Future Value or GMFV).

You might find that you’ll pay less each month than you would with another car finance option like HP (Hire Purchase), but be aware that driving too many miles and getting any big bumps and scrapes could leave you with extra charges at the end of your agreement - it pays to be a careful driver!

 

How does PCP work?

If you’re thinking about PCP, you’ll need to pass a credit check first.

Next, think about how much you might need to borrow and how long you’d like to have to pay it back.

All sorted? Now, let’s look at the nitty-gritty.

PCP is split into three parts:

The deposit

No deposit PCP options are available but some lenders will ask you to pay a deposit. The bigger your deposit, the less money you’ll need to borrow. You’ll also have to agree how long the agreement will last and what your mileage limit will be. 

The amount you borrow

This will depend on how much the lender thinks your car will depreciate or lose value while you have it. That amount - minus your deposit but plus interest - will be what you pay back, not the full value of the car.

The balloon payment

This is the amount you’ll need to pay if you want to buy the car at the end of your PCP agreement. It’s how much your car is expected to be worth at the end and is also known as the Guaranteed Minimum Future Value or GMFV. The amount can range from a few hundred to a few thousand pounds, so you may want to consider financing options to help cover it.  

Ready to find out more?


What happens at the end of your PCP finance agreement?

When your PCP finance agreement ends, you have three options: 

  • Pay the balloon payment and buy the car

You’ll need to pay the GMFV, as agreed at the start.

 

  • Hand the car back and walk away

Keep in mind that if you’ve driven more miles than you agreed or the car’s damaged (more than normal wear and tear), you might have to pay more.

 

  • Get a new car

At the end of your agreement, your car may be worth slightly more than your balloon payment. In that case, you could use that equity – the difference between the balloon payment and the car’s value – as a deposit for a new PCP agreement.

 

Is PCP right for me?

  • Do you like to change your car pretty regularly?
  • Are you a careful driver?
  • Do you mostly drive short distances?

If you answered yes to any of these questions, PCP could work for you.

Still not sure?

Check out the pros and cons to find out whether PCP could be the right car finance option for you.

 

Why choose PCP car finance?

Pros

  • Your monthly payments might be lower than they would be with other car finance options
  • It’s flexible – you can choose to buy the car, give it back, or trade it in for a new one
  • Your monthly payments are fixed – no surprises!
  • You might be able to afford a more expensive car than you first thought
  • You’ll have access to newer cars – no getting stuck with an old banger!

Cons

  • You won’t own the car during your agreement period
  • You won’t own the car when your agreement ends unless you pay the balloon payment
  • You’ll have to pay more if you drive more miles than you agreed
  • You’ll have to pay more if you don’t keep the car in good condition
  • You might need to pay a deposit upfront
  • If the GMFV of your car is very close to the actual car value, you won’t have a lot of equity to roll over into a new PCP agreement

Ready to find out more?


What factors affect your monthly PCP payments?

Wondering how much your monthly payments will be?

There are a few things that could change the amount you have to pay each month:

Depreciation

This is the amount of value your car will lose while you have it

Deposit

The more you can pay upfront, the less you’ll have to pay each month

Contract Length

The longer your agreement lasts, the lower your monthly payments will be. Keep in mind that you will pay more interest though, so you might end up paying more overall

Mileage limit

The lower the number of miles you agree to, the lower your payments will be

APR

The APR or interest rate that you’re charged will affect the cost of your monthly payments as well as the amount you pay overall

 

Alternative car finance options to PCP

PCP not for you? Don’t worry; there are plenty more car finance options out there, including Hire Purchase and Guarantor loans!  

Hire Purchase (HP)

With HP, your loan is secured against the car you’re buying and it won’t officially belong to you until your final payment. Usually, you’ll pay a deposit and then repay the rest in instalments, plus interest, for anything from 12 months to 5 years. You can find out more about HP here

Guarantor Loan

Suffering from a bad credit rating? A guarantor loan could provide a car finance solution. This option would need to involve another person who would act as a guarantor on the loan. If you fall behind or miss a repayment, your guarantor will have to step in and pay the monthly payments on your behalf. You can find out more about personal and guarantor loans here

 

PCP Jargon-busting

Check out our quick-fire guide to the PCP finance terms you need to know:

APR/interest

This is the amount/rate you’re being charged for borrowing money from a lender. APR stands for the Annual Percentage Rate and it includes any initial fees and compulsory charges as well as your interest.

Depreciation

This is how much your car will reduce in value over time.

Mileage Limit

The number of miles you can drive will be set at the start of your agreement and you’ll be charged for every mile you go over it.

GMFV

GMFV (Guaranteed Minimum Future Value) is the amount it is agreed your car will be valued at if you want to hand in your car or trade it in for a new PCP agreement. It depends on the number of miles your car has done, its condition, service, and maintenance record, and is based on the terms of your agreement, the anticipated mileage, and the vehicle type.

Balloon Payment

This is the amount you will need to pay at the end of your agreement to own the car.

Deposit

This is the amount of money you pay at the start of your agreement. The higher your deposit, the lower your monthly instalments will be.

 

The nuts and bolts…

  • PCP stands for personal contract purchase and is a flexible car finance option

  • You’ll pay a deposit and monthly payments for an agreed time period and then have the option to buy the car, return it, or trade it in for a new PCP agreement

  • Terms and conditions will apply – you’ll need to agree to a set mileage and not damage the car to avoid extra charges

  • Your monthly payments may be lower than with other car finance agreements but you won’t own the car unless you opt to pay the final balloon payment

  • PCP could be for you if you’re a careful driver that wants to change car every two or three years

Ready to explore your car finance options?

We work with a panel of lenders to find a car finance option that works for you. This means we can look to find loan options for people with a variety of credit histories, from excellent to bad credit car finance.

Make an application now to find out more. Rates from 6.9% APR. Representative APR 25.4%

Ready for that new car feeling?