What is PCP finance?

The most flexible way of buying a car on finance: PCP finance explained

BuyaCar team
Apr 29, 2019

What is PCP?

Nine out of ten people who buy a new car in the UK do so using finance. PCP (Personal Contract Purchase) is the most popular type, and it’s increasingly being employed for used car purchases too.

People are drawn to PCP deals because they offer fixed, low, monthly payments, and the option of buying the car at the end.

The repayments on a PCP deal only cover the value that the car is expected to lose during the agreement. This is sometimes referred to as depreciation. This makes monthly instalments cheaper than Hire Purchase, another type of car finance.

Agreements typically last between two and five years. At the end you can simply hand the car back with nothing more to pay, or buy the car outright. You can pay in cash, or by refinancing.

There’s another option too: selling or part-exchanging. A car is sometimes worth more than the final payment, which means that trading or selling it can raise enough money to settle your finance agreement, with some money left over. You can pocket this money, or it can be used as a deposit on another car.

Mileage limits start at around 8,000 per annum and run to 20,000 miles. You’ll be charged for exceeding your mileage limit - usually around 6-10p per mile. Watch out for damage charges too.


PCP advantages

✔ Low monthly payments & incentives
✔ Range of options at the end of the deal
✔ Regularly upgrading to a new car
Protection for unexpected loss of value

PCP disadvantages

✘ High-mileage drivers
Used cars over five years old
✘ New car buyers who know they'll return the car at the end   


How PCP works

1. You may need to pay a deposit, but many PCP deals don’t require one.
2. Choose how long you want the PCP deal to last (usually between two and five years). You’ll then make set monthly payments until the end.
3. At the end of the contract, you have three options:

  • Return the car with nothing to pay - even if it's worth less than expected.
  • Keep the car by paying a lump sum, known as the balloon payment or guaranteed minimum future value (GMFV). You can refinance to spread this cost.
  • Trade the car in for another one. If it's worth more than the balloon payment, then the difference can be used towards a deposit on another finance deal, helping to lower your next set of payments.
1. Deposit & delivery
  • The larger the deposit, the lower your monthly repayments
  • A no-deposit option is often available
2. Monthly payments
  • A fixed payment is due every month for the rest of the agreement
  • You only repay part of the car's cost, keeping instalments low
3. Buy / return / upgrade
  • Pay the remaining balance or refinance to keep the car
  • OR Return the car and owe nothing
  • OR Trade-in for another vehicle if the car is worth enough


    Used car PCP

    PCP is available on new and used cars up to four or five years old. In both cases, finance incentives often apply, with deposit contributions available.

    Older cars are not normally available with PCP because it becomes difficult to predict their value at the end of the agreement, so the monthly instalments and balloon payment can't be calculated accurately. In these cases, Hire Purchase finance (HP) is usually offered, which spreads the total cost of a car across a series of fixed monthly payments. You will then own it at the end.



    How do I make PCP affordable?

    • Your PCP repayments are based on the difference between the car's price at the start of the agreement and its estimated value at the end (the Guaranteed Minimum Future Value). This difference, minus the deposit, is divided into equal monthly instalments and interest is added. In-demand cars that hold their value well tend to come with relatively low monthly payments because the difference is smaller, although the balloon payment is higher should you choose to buy the car.
    • Low interest rates - especially 0% interest - play a big part in keeping costs low, particularly with PCP because you are charged interest throughout the agreement on all of the outstanding debt. This includes the large optional balloon payment, which racks up interest charges throughout the repayment term.
    • A bigger initial deposit results in lower monthly payments and reduces your interest charges. Opting for a longer PCP deal (such as five years instead of three) will also cut your monthly payments, although you’ll pay more interest over the course of the agreement.
    • You can reduce the overall cost of PCP at the end of the agreement if your car is worth more than the final balloon payment. By returning the car, you will effectively be overpaying (when the finance company sell it on, the proceeds combined with your earlier repayments will add up to more than they were owed). Instead, you can trade it in for another vehicle using the difference between the car's value and the balloon payment for the deposit on another finance agreement. Alternatively, if you had the cash available, you could make the final balloon payment and then sell the car for its true value, leaving you with more money for your next car than if you had just handed it back.


    PCP vs HP

    PCP vs PCH

    PCP is the most used type of finance for a number of reasons, one of them being because of how heavily incentivised PCP deals are. Dealers and lenders regularly offer low interest rates and deposit contributions to entice people, so there’s every chance that a PCP deal will be cheaper than other forms of finance, bank loans, or even savings.

    That said, Hire Purchase may be cheaper in the long run if you want to own a car outright. This is because you pay off larger instalments, reducing the cost of interest. With this, you own the car at the end, which means you’ll feel the impact if the car suddenly loses value.

    PCH (Personal Contract Hire) or leasing, may be the cheapest option if you know that you don’t want to own the car. There’s no guaranteed option to buy at the end, and it’s generally only offered with new cars, but it’s also one of the simplest as it’s effectively a long-term rental.

    It's easy to compare different types of finance deals because you should be told the total amount that's payable over the course of the agreement. With PCP, this normally includes the optional final balloon payment.


    How are PCP payments calculated?

    All of the payments in a PCP deal depend on the final balloon payment - the guaranteed minimum future value (GMFV). This estimate of how much the car will be worth at the end of the agreement, and is based on industry data.

    The deposit and monthly payments then cover the value that the car loses during the term - also known as depreciation. You pay interest on all of the money that you borrow, though - including the final balloon payment.

    The GMFV means that you don't have to worry about the car depreciating faster than expected. If it's actually worth less than the estimate at the end of the agreement, then you can still walk away with nothing to pay.

    However, the car is often worth more - because most GMFV estimates are on the low side. As long as this is the case, this opens up the option for you to trade the car in, with the difference between the car's value and the final balloon payment going towards the deposit on a new finance agreement.


    How does PCP trade-in work?

    Instead of returning the car and walking away, you can trade it in and drive away in a new model. As long as the car you're trading in is worth more than the final balloon payment, then the difference can go towards a new finance agreement. It often covers your entire deposit, so there may be no need to dip into your savings.

    It's important to remember that this isn't free money that's appeared out of nowhere - you’ve funded it through your monthly payments which were based on a very cautious estimate of your car's future value.

    If you’re looking to finance another car, then this trading-in is often the best option because it's common for cars to be worth more than the balloon payment. But bear in mind that this isn’t guaranteed. A particular risk is an economic downturn, when demand for cars may reduce. This will lower the value of used cars, and may mean that your car is worth no more than the guaranteed future value.


    Can I trade in my car with a different seller?

    Yes. Few sellers will want to miss out on your business. You can usually trade the car in with a different seller or manufacturer at the end of your PCP deal. They will ensure that the finance is settled, and will be able to use any surplus in the trade-in value as a deposit. They may even value the car more highly, giving you a bigger deposit for your next vehicle.


    Can I end my PCP contract early?

    Yes. Whether you want a different car or are looking to reduce your payments, you can end your contract early by requesting a settlement fee from the finance company. Once this fee is paid, you should owe nothing more to the lender. If you have the cash, you can simply pay it off and you'll own the car.

    That's not an option for many people, so it is possible to sell or part-exchange your PCP car with the agreement of your lender, who remains the owner of the car until the agreement is settled. This is normally arranged through a car retailer.

    If you are near the end of the agreement, then your vehicle may be worth more than the fee. In this case, most of the proceeds of the sale or part-exchnage will go to your lender. The remainder of the money will either come to you or be put towards your next car.

    When your vehicle is worth less than the settlement fee, then you'll need to pay the difference between the car's value and the amount owed to the lender. This can be done through your own funds. If you are part-exchanging the vehicle for another one, then you may be able to take out a negative equity loan. This will cover the cost of the new car, as well as the remainder of the settlement fee, which you'll repay in monthly instalments. 

    If you're struggling to make your monthly payments, other solutions are available. This differs from lender to lender, so it's worthwhile checking with them to see what they offer.

    Voluntary termination

    You’re allowed to terminate your contract voluntarily once you’ve paid off half of what you owe. Once you’ve done this, you can simply give the car back with nothing more to pay. Word of warning though: because the total amount owed includes interest, fees, and the final balloon payment, you won’t get to this point until fairly late on in the agreement,

    If you don’t want to wait this long, it is possible to activate the voluntary termination by making a one-off payment that pays your 50%.

    You can also repay your PCP agreement early. This, generally, saves you money in the long run on interest payments, but you’ll usually need to pay an additional fee that covers some of the interest that the finance company is missing out on.


    What happens if a car on PCP is worth less than expected?

    One of the biggest benefits of a PCP agreement is that it offers total protection against a sudden and unexpected drop in car values. Once you've made all of your monthly instalments, then you can just hand the car back with nothing more to pay, even if it's worth thousands of pounds less than its Guaranteed Minimum Future Value (GMFV).

    However, an unexpectedly low valuation will limit your options at the end of a PCP agreement. If the car is worth less than the GMFV, then you won't be able to trade it in; you'll need to find the money for a deposit towards another car, or opt for a no-deposit agreement.

    Buying the car also doesn't make sense as the cost would be the GMFV - more than the car is worth. In this situation, you'd be better off handing the car back and buying a similar model that's on the market for the accurate lower figure.

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    What happens if I crash a car on PCP?

    One of the conditions of taking out a PCP agreement is usually that the car is covered by fully comprehensive insurance. This would ensure that any repairs are paid for.

    If the car is written off, then the insurance would normally pay out for the value of the car at the time. This would go to the finance company, which is the owner of the vehicle during the PCP term.

    However, if the car has lost a lot of value soon after you bought it - which is often the case with new vehicles - then it may be worth less than the amount that you owe to the finance company. You would have to make this difference up, so you can take out guaranteed asset protection (GAP) insurance to pay for this.

    If your car is less than a year old, then it may benefit from brand new replacement cover, which is often included in insurance policies. This covers the cost of replacing your vehicle with a brand new example, which is likely to clear your debt.


    Car deals with PCP     


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