Is PCP car finance worth it?

Personal Contract Purchase  – otherwise known as PCP – is one of the popular ways to finance a car. But that doesn’t necessarily mean it’s the right option for everyone. Some people love the ownership flexibility and typically lower monthly payments, while others find the restrictions and the balloon payment a downside.

So, what is PCP car finance, and is it right for you? This guide explains how it works, what to expect and the pros and cons you might want to weigh up. 

What is PCP car finance and how does it work?

PCP is a type of car finance designed to give you flexibility at the end of your agreement. Unlike Hire Purchase (HP), you don’t have to keep the car. And, instead of paying off the full value of the car, you only pay for the amount the car is expected to lose in value during the time you have it (depreciation).

Here’s how a PCP agreement works:

• Deposit
  You may pay an upfront deposit in PCP. A higher deposit helps reduce your monthly payments.

• Monthly payments
  Your monthly payments cover the difference between the car’s price and its Guaranteed Future Value (GFV). Because you’re not paying off the full value of the car, these payments are usually lower than with other finance options like Hire Purchase.

• Guaranteed Future Value (GFV)
  The GFV is a key part of PCP. It’s an agreed value set at the start of the contract and is based on factors like the car’s age and mileage. It’s essentially what the lender expects the car to be worth in the future.

• Your options at the end
  When the agreement ends, you have three options: hand the car back, pay the balloon payment to own the car, or part exchange it. This flexibility is a big reason why PCP has become so popular.

• Final balloon payment
  If you decide to keep the car, you’ll need to pay a final balloon payment equal to the GFV. If you don’t want to keep the car, you don’t pay this amount at all.

Pros and cons of PCP at a glance

Understanding PCP pros and cons will make it easier to decide if it fits your lifestyle. This quick table outlines the main benefits and potential drawbacks for some people.

Is PCP worth it? Key benefits explained

Now let’s look into some of those key benefits of PCP in more detail.

Lower monthly payments

One of the biggest PCP benefits is monthly affordability. That’s because you’re not paying off the full price of the car, just the amount it’s expected to depreciate over the length of your contract. PCP is also available on used cars, which tend to depreciate more slowly than brand new ones, helping to keep costs down.

Flexibility at the end

PCP gives you choices. You could keep the car, return it, or part exchange it for something newer. This flexibility is one of the key benefits of PCP, especially if you like to switch up your car every few years.

Drive newer cars more often

Unlike HP, you could hand the car back at the end of a PCP deal and upgrade to another one. So, you’re not stuck with a car you don’t like, and can get newer models with better tech and features every few years if you wanted to.

Protection from depreciation (GFV)

When your PCP agreement ends, you’re free to return the car if you don’t want to buy it or trade it in. This means depreciation is no longer your concern.

So, is PCP a good idea for you? It could be if these benefits stand out to you.

Disadvantages of PCP: What you need to know

But like anything, it’s also important to consider the key drawbacks.

Mileage limits and excess charges

PCP agreements come with annual mileage limits that you have to agree to at the start of the contract. If you go over them, you’ll usually pay a charge per extra mile. This is one of the most common disadvantages of PCP, especially if you rack up a lot of miles. It’s important not to underestimate how many miles you’ll likely do across the year.

Condition/repair expectations

Likewise, when you return the car, it needs to be in good condition. Any damage that falls outside of standard wear and tear can result in extra charges. This isn’t the case with HP, as you would be keeping the car at the end. This is one of the PCP disadvantages that can catch people out at the end of their contract.

No ownership unless you pay the balloon 

Unless you pay the final balloon payment, the car isn’t yours. This is one of the main personal contract purchase disadvantages for people as you’re not gaining equity, you’re essentially borrowing a car on long-term loan. To own the car, you have to pay the balloon payment.

Total cost can be higher

PCP keeps monthly payments low, but that doesn’t necessarily mean it’s the cheapest option overall. One of the dangers of PCP finance is not thinking about the long term. Interest is added to the agreement, which builds up over time. And, if you choose to buy the car, you’ll also need to pay the balloon payment. When everything is added up, the total amount paid can be higher than buying outright. It’s worth weighing up whether the flexibility is worth the extra cost.

Restrictions on modifying the car

Because the car belongs to the lender until the end of your contract, there are usually limits on making changes to it. Most lenders don’t allow modifications without approval, especially if they affect the car’s value. Minor, reversible changes may sometimes be allowed, but permanent changes can lead to charges when the car is returned.

PCP vs Buying: Which is better?

PCP vs buying outright

Buying a car outright means you pay the full cost upfront and own it immediately. There are no monthly payments, no interest, and no mileage or condition restrictions. This could work well if you have the savings available and plan to keep the car for a long time.

But, PCP allows you to spread the cost over more affordable monthly payments. You don’t need an upfront payment (unless you plan to put down a deposit) and you have the option to hand the car back or change the car at the end of the agreement. 

Is PCP better than buying outright? Only you can decide that. Consider your short and long-term finances and whether spreading the cost is preferable to you. Also consider whether car ownership is important to you, as you won’t own the car unless you decide to pay the final balloon payment at the end.

PCP vs HP

With HP,  you pay off the full value of the car in monthly instalments. Payments are usually higher than PCP, but once the agreement ends, the car is automatically yours with no balloon payment to worry about.

On the other hand, PCP could offer lower monthly payments and more flexibility at the end of the term. But, if you want to keep the car, you’ll need to pay the balloon payment. 

So is PCP good for you, or would HP be a better fit? If you like changing cars regularly and keeping monthly costs down, you may prefer PCP. But if you want straightforward car ownership with no restrictions, HP might be a better choice.

Check out our guide on understanding the difference between HP and PCP finance for more information.

So, is PCP worth it for you? It really depends on your short and long-term finances and whether flexibility or ownership matters more to you. If you’re still deciding, check out more of our PCP guides: 

• Can I get PCP with bad credit? 

• Why have I been declined PCP finance?

• Car finance or bank loan, which should you choose?

Disclaimer: Car Finance 247 Limited is a credit broker, not a lender. Finance is subject to status and affordability, and not everyone will be accepted. Approval is not guaranteed. We do not provide financial advice. Please read all terms and conditions carefully before applying. Figures in examples are for illustration purposes only and may vary depending on your circumstances and lender.