Car finance deposit: for PCP and Hire Purchase

Car finance typically involves a deposit, but do you ever get it back? No, but you can get some money back at the end of the contract

By Simon Ostler Jan 24, 2022

Toying with the idea of a car finance deal to make your next car purchase more affordable in the short term? Car finance can be a great way to spread the overall cost of a car into smaller pieces that you pay off gradually rather than all in one go.

In the case of PCP finance, that cost is split into three sections: an initial deposit, a series of monthly payments, and then an optional final payment. With a PCP deal, you do not become the owner of the car until that optional final payment has been made.

If you were to opt for a Hire Purchase (HP) deal, that too splits the overall cost into smaller chunks, but in this case you pay an initial deposit followed by series of monthly payments that cover all of the remaining cost of the car, meaning you'll automatically become the owner of the car at the end of the contract.

No matter which way you decide to go then, the first step on the car finance road is a deposit. Read on for all the details, and if you're keen to get started on your used car journey, head over to our BuyaCar search page and we could deliver a car to your door within a fortnight.

For information about all the different types of car finance, how to get it, and how to ensure you get the best possible deal, our expert guides will walk you through the process step-by-step.

What is a car finance deposit?

A car finance deposit is an initial lump sum paid at the start of a finance deal. The exact amount you pay is entirely up to you, although more expensive cars will tend to require larger deposits if you want to ensure you're getting lower monthly payments. You can even find zero-deposit finance deals, but you'll need a strong credit score to be accepted, and no deposit deals tend to come with higher interest rates, so cost more in the long run.

The most common car finance formats are PCP and HP - both of which involve paying a deposit. The larger the deposit you put down, the lower your monthly payments are likely to be, because you're borrowing less overall. The amount of interest you pay goes down as you increase the size of the deposit, too - unless you’re looking at an interest-free credit deal, in which case you pay no interest, regardless of how much you pay upfront.

Confusion arises from the fact the motor industry uses the word ‘deposit’ - which can refer to refundable and non-refundable payments. Often a deposit is refundable provided you give something back in good condition - a rented flat or even a shopping trolley are examples.

With cars though, that is not the case - it is best to think of a finance deposit as just another payment, as you won’t ever receive a big bag of money labelled ‘your deposit’ back from the finance company.

Equity: when a car on PCP is worth more than the remaining debt

If you choose a car that ends up being worth far more at the end of the contract than the remaining finance balance - which is known as having equity - you may well be in a position to recuperate some of the money you paid on your finance deal.

It's possible that the amount of equity on the car could be enough to cover a proportion - or potentially all - of your deposit if the car you return does have equity in it, however. The possibility of equity arises because many lenders are very cautious when estimating what a car will be worth at the end of a finance contract, so that if there is an unexpected fall in used car values they’re not left out of pocket. This means that many finance companies set the optional final payment - what you must pay if you want to buy the car at the end of a PCP contract - artificially low, raising the likelihood of the car being worth more than this.

So, if the car is worth more than expected at the end of the contract, you can effectively get money back that could potentially match - or even exceed - the deposit you paid. This is not cash that is paid to you, however, and is never guaranteed, it's just a return of money you've already paid, and you can only take advantage in certain circumstances. Keep reading to find out more.

How to get money back at end of PCP contract

With PCP finance you have three choices at the end of the contract. Firstly, you can return the car and walk away. Do this and you can’t take advantage of any equity the car may have. Secondly, you can make the optional final payment to buy the car. Do this and you now own it.

If you want to free up any extra value over the optional final payment you would have to then sell it. Depending on what price you sell it for, you could effectively cash in some or all of the equity, though bear in mind that cars can also be worth less than the optional final payment, too. If that’s the case you’d lose money if you were to make that final payment and sell it.

The main way drivers can get money back, however, is through ‘trading in’ a car on PCP that has equity in it. That means that the place you’re purchasing a new car from will effectively pay off the finance on your current car and put the extra value in the car towards the one they’re selling you.

To establish whether there’s likely to be any equity in your car (be aware that negative equity is the opposite), ask the finance company for the settlement figure, i.e. the remaining balance needed to pay off the finance. Then gauge how much a dealer, finance company or car buying service would pay for the car. If they’d pay more than the settlement figure, you can claw back that extra value, effectively getting back part or all of the deposit.

The key to getting as much of your deposit back as possible this way is to make sure the car is in the best possible condition and within the pre-agreed mileage limit, as you can expect to be charged for any excess mileage or damage to the car.