If you’re looking to purchase a used car, you might be considering a Personal Contract Purchase finance agreement as a method of payment.

Personal contract purchase, also known as PCP, is one of the most common types of used car finance. Paying for a car outright can be a big expense but choosing to finance your car allows you to spread the cost of the vehicle over a few years rather than paying for it all in one go.

In this article, we’ll explain what PCP is and how it works so you can make an informed decision when choosing the right car finance for you.

 

What is PCP finance on a car?

PCP finance is a popular way of financing used cars and vans as it allows you to spread the cost of the vehicle over a longer time period.

The amount you borrow will be based on a prediction of how much the value of the car will decrease over the term of the deal rather than the total value of the vehicle.

Choosing to finance your car on a PCP agreement is a great option for those who like to change their car regularly as there is no commitment to keep the car at the end of the deal.

Alternatively, you can choose to make a payment at the end of your agreement in order to purchase the vehicle outright.

PCP agreements last anywhere between three to five years and the interest you pay will depend on your credit rating score.

How does PCP finance work?

When taking out PCP financing, you’ll be required to pay a deposit at the start of your agreement.

Generally, this is about 10% of the value of the car. However, choosing to pay a higher deposit could make your instalment payments cheaper in the long run.

The amount you borrow will be based on the depreciation value of the car. This amount will then be paid through monthly instalments and the interest you owe will also be added.

At the end of your term, you will have the option to make a “balloon payment”, also known as a Guaranteed Minimum Future Value (GMFV), which will be agreed upon at the start of the deal. By choosing to make this payment, you will become the legal owner of the car.

Alternatively, you can return the car or use the equity from the original car on a new vehicle.

What are the advantages of PCP?

The biggest advantage of PCP agreements is that they allow you to purchase used cars through an affordable monthly payment plan rather than having to pay upfront for the vehicle.

This can often result in giving you a greater choice and more affordable options within your price range. This type of finance is also popular for those who like to change their car regularly as you are not contractually obliged to purchase the car at the end of your PCP contract.

Instead, you can choose to hand the car back or trade it in for a different one. To some extent, you are also protected against depreciation because the finance company will guarantee what the car will be worth, regardless of its true depreciation.

If it’s worth less than predicted at the end of the deal, you have no obligation to keep paying for the car.

 

What should I consider before taking out a PCP agreement?

Ownership, mileage and modification limits

One of the main disadvantages of PCP is that you are not the legal owner of the car until all repayments have been made. Because of this, there will be limits placed on the mileage and you will not be able to modify the car for the duration of the agreement.

Final payment

If you decide you want to purchase the car at the end of the contact, the balloon payment can be expensive. This amount will be agreed upon at the start of the contract so there is time to consider if this is right for you.

Damage

If you decide to return the car, you might be charged for any damage that is not considered fair wear and tear.

Ending the contract early

If you choose to leave your contract early, it can be costly so you must ensure that the repayments are achievable.

Is PCP finance a good option for me?

This will ultimately depend on your needs and personal circumstances when deciding if a PCP contract is right for you. If you aren’t sure, it is worth shopping around and getting advice from a range of lenders before making a final decision.

FAQs

What is the difference between Personal Contract Purchase and Hire Purchase?

One of the main differences between PCP and HP finance is that at the end of a PCP contract, you are not obligated to take ownership of the car and instead will be given the choice as to whether you want to make the final payment.

With PCP agreements, you will also be bound by mileage restrictions and you could be charged for wear and tear if you return the car in an unsuitable condition.

Can you modify a car on PCP?

You will not be able to modify the car without the consent of the lender until all payments have been made. This is because you are not the legal owner of the vehicle until the end of the agreement.

Is PCP bad for my credit score?

Taking out a PCP agreement can actually have a positive impact on your credit score, providing you successfully pay your monthly instalments on time.

This is because it demonstrates to lenders that you are capable of repaying credit on time, increasing your chances of securing a loan in the future.

Can I end my PCP contract early?

PCP contracts can be ended early through what is known as voluntary termination. You must have already paid 50% of the total amount payable. If you have not reached the 50% point, you will have to continue paying until you reach this amount.

Alternatively, you can end the contract through an early settlement and this can be done at any point during your agreement.

However, you will be expected to pay the outstanding finance balance (including interest), the final balloon payment and any admin fees. If you are struggling to keep up with payments, or need to discuss your options, you should contact the finance company directly.

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Steve Edwards
A certified car nerd who has been creating car content since 2015, Steve is much happier talking about used cars under £15,000 than the latest hypercar. He’s been advising friends and family on their next used car purchase for as long as he can remember – handy experience for his current role in charge of content at MOTORS. As a father of two young kids who covers a lot of miles, he tends to value safety, practicality and comfort above all else, so he has a soft spot for massive SUVs and premium estate cars.
Article published July 31st, 2023