How to get the lowest monthly payments with used car PCP finance

Looking for the cheapest monthly payments on your next set of wheels? Used car PCP finance could be your best bet

John Evans
Feb 18, 2022

Personal Contract Purchase finance (PCP) makes your money go further than a traditional car loan, with lower monthly payments for the same car. That's possible because the monthly payments only cover a portion of the car's value, helping you to step into a newer, more desirable model. This is equally true with used cars, where you can benefit from even more affordable payments than with new cars, making it a quick way to slash your monthly car bills.

With PCP you pay an initial deposit - typically around 10% of the initial price of the car, though smaller and larger deposits are normally possible - followed by a series of monthly payments that cover the difference between the car's price at the start of the contract and what it's expected to be worth at the end.

When the contract comes to an end, you can choose to pay off the remaining balance - known as the optional final payment - to buy the car outright. Or you can effectively trade it in for a new finance deal, putting any equity - should the car be worth more than the remaining balance at this stage - towards a deposit on your next car. Alternatively, assuming you have stuck to the pre-agreed mileage limit and the car is in good condition, you can hand the car back and walk away with nothing left to pay.

PCP finance was initially only available on new cars but is now widely available on used models and works in a similar way. With a used model, the monthly payments are usually even lower, as the amount you're financing is less, due to used cars' lower initial prices than new equivalents.

The big difference is that used cars don't lose anywhere near as much value as new cars - since cars depreciate fastest when brand new, slowing as they get older - and so your monthly payments should be dramatically lower. As a result, you can typically get much more for your money with used car PCP finance.

Keep reading to find out how to maximise what you get for your monthly budget and watch our video guide below for an overview of how PCP finance works.

Why is used car PCP cheaper than new car PCP?

A brand new car can lose up to 40% of its value within its first year on the road. After three years, many cars have lost around 60% of their initial value. It's that difference in value that you pay for with PCP finance monthly payments, so a three-year contract on a new car could see you paying well over half of the car's price in monthly payments. Choose a £20,000 car, for instance, and that could mean your monthly payments amount to £12,000 (plus interest), with the car only worth £8,000 after three years.

Meanwhile, if you financed a one-year-old car that had lost 40% of its value already - meaning an initial cash price of £12,000 - you can expect far lower monthly payments, as the amount you're financing is much lower. Even if you took a shorter two-year contract - with shorter contracts normally meaning higher monthly payments - and the car was expected to be worth £8,000 at three years old, like the new car above, your monthly payments would only total £4,000.

Split those costs across the length of the contracts and the £20,000 new car would cost you £333 per month (plus interest), while the £12,000 one-year-old model would only set you back £167 per month (plus interest) - half as much. Do bear in mind that new cars may come with finance discounts and lower interest rates that are often subsidised by the car company - so the difference is often not quite so large in reality - though going for used car PCP finance is still likely to give you much lower monthly payments. 

Finance an older car that's lost even more of its original value, on the other hand, and you can expect lower monthly payments again, as the amount you're financing is lower still. This could potentially allow you to go for Hire Purchase instead for an affordable monthly payment, meaning that you'd automatically own the car once you'd made your last monthly payment, if owning the car is important to you.

Another bonus of used car finance is that the deposit is generally much lower - reflecting used cars' lower prices at the start of the contract. Meanwhile, this lower value also means that the optional final payment needed to buy the car outright is much less, too.

If you're sure you want to own the car outright and want to pay less overall, rather than having the lowest monthly payments, however, Hire Purchase (HP) could make more sense. Keep reading to understand how PCP finance offers lower monthly payments, but HP should cost you less overall if you want to own the car.

Why are PCP finance monthly payments lower than Hire Purchase ones?

The difference is that with Hire Purchase your monthly payments cover the whole cost of the car - so the car is yours once you've made all the monthly payments - while with PCP you don't own the car once you've made all the monthly payments; at this stage, you have to make the substantial optional final payment if you want to take ownership. Otherwise, you have to hand it back.

This means that HP instalments are larger, but once you've made your last monthly payment the car is automatically yours. With PCP, however, the monthly payments are low, but you have to make an additional large lump sum payment to buy it. As a result, the more the car is expected to be worth at the end of the contract, the lower your monthly payments, but the more you have to pay if you want to buy it when the contract ends. 

Another side effect of the larger Hire Purchase monthly payments is that you pay less interest than with an equivalent PCP deal. That's because you're repaying the finance balance quicker, meaning less interest builds up.

Since more and more drivers, however, are focused on getting the best car for the lowest monthly payment, PCP finance has rocketed in popularity. If you're not concerned about owning the car outright or would rather prioritise affordable monthly payments over owning the car without a large final payment, then PCP is for you.

Another bonus with PCP comes in not having to worry about the future value of the car. Even if your car plummeted in value unexpectedly, it's the finance company that takes the risk, as you can choose to hand the car back at the end of the contract with nothing extra to pay (provided you stick to the pre-agreed mileage limit and keep the car in good condition).

Meanwhile, if you'd bought the same car through Hire Purchase and planned to sell it at the end of the contract, you'd be likely to lose out by getting less for it at this stage than expected, were its value to fall more than predicted. This happened with some diesel cars following the diesel emissions scandal, which saw the popularity - and consequently, the used car values - of many diesel cars drop.

Not sure whether HP or PCP finance is best for you? Read our guide to Hire Purchase vs PCP finance.

Best PCP deals for less than £200 per month

PCP: why are some cars cheaper than others?

Some cars cost less than others on PCP finance, despite having the same cash price. This is all to do with the optional final payment. The higher it is, the lower your monthly payments - as payments are calculated to cover the difference between the car's initial price and its expected value at the end of the contract.

Cars with strong residual values that are in demand second-hand often cost less per month than you might expect, as the high initial price can be outweighed by the very high predicted value when the contract is over. Meanwhile, undesirable models that lose value quickly may not be as good value as you expect, as they may cost less to begin with but could lose most of this value over the contract.

Cars such as the Audi A5 Coupe (above) are known for having very strong values second-hand, especially compared with less popular models such as Toyota Verso compact people carrier (below). This can be seen in how an £18,995 2017 Audi could cost £225 per month on PCP finance compared with an £18,995 2016 Toyota which costs £329 per month (with identical contract terms).

As these cars have identical cash prices, it's the residual values that make all the difference; while the Audi is expected to drop to just over £11,000 in value after four years, the Toyota is predicted to be worth less than £5,000 at this stage.

Consequently, monthly payments for the Audi cover the difference between the £18,995 initial price and the £11,001 optional final payment - a difference of £7,994. Meanwhile, monthly payments for the Toyota are higher as they cover the difference between £18,995 and the low £4,974 predicted final value - a fall of £14,021.

Therefore, it's always worth getting finance quotes (with the same contract terms - contract length, deposit and mileage allowance) for a range of different models to see whether you could get the car you really want for less than another model that would simply do the job.

Why not just increase the optional final payment?

Do this and at the end of the agreement, the finance company would be left with a car that is worth less than it owes them, and it would soon go out of business or have to pass the higher cost on to borrowers in another way - such as inflated interest charges or other fees.

A number of manufacturers are very cautious when working out the optional final payment; this means they work out what they believe the car will be worth at the end of the contract and then set the actual payment as a lower amount, just in case.

What this means is that your monthly payments are typically a little higher than they could be, but you should have at least a little equity at the end of the contract - where the car is worth more than the remaining finance balance when the contract ends.

As drivers can put any equity in their current car towards their next finance deposit, this can help to reduce your monthly payments next time around, which could get you into a more desirable car. Be aware, though, that equity is not free money - it just means you've paid a little extra each month so you might get something back when you come to hand the car back.

Other manufacturers, however, don't build in this safety net, so you may not end up with any equity at all. As a result, it's important to shop around and compare prices, so that you can find a car that suits your needs that you can afford. And it's wise to put a little money aside each month for the deposit on your next car, so whether you end up with equity or not you should be able to afford the monthly payments on your next car.

Optional final payments: why are some so high?

This is because cars lose value at different rates. In simple terms, models with a strong image, with prices that aren't discounted much from new, that are likely to be in demand for years to come, are likely to be worth more used than less desirable models. As a result, finance companies may feel confident enough to use higher optional final payments with this type of car.

This can provide the pleasant surprise that some used cars such as certain Audis, BMWs and Volkswagens, for example, can be just as affordable to finance with PCP than those from less desirable brands, even if they have a higher initial cash price. That happens when the optional final payment is high enough compared with other cars to counteract the higher initial cash price.

High optional final payments: what are the risks?

As high optional final payments usually go hand in hand with upmarket cars of some description, it’s likely this type of car may cost more in the first place, meaning that the amount you have to finance could be the same as a car that loses money faster but has a lower cash price. Still, at least you’d get a more desirable car for the same monthly payment.

If it’s an inflated amount that doesn't reflect the car’s future value, meanwhile, you may find yourself at the end of the term with less equity than expected or even none at all, to put towards your next finance deal. You won't be out of pocket with PCP finance if that's the case, but you may also have nothing to show for all the payments you've made. It's best to put a little money aside each month during your contract so you have the cash to hand for the deposit on your next car - whether there's any equity in the car you're returning or not.

If you want to buy the car at the end of the term, you may find that it is simply too expensive for you to do so with a high optional final payment. Yes, you can refinance this amount, so that eventually you do own the car, but considering you'll have already paid interest on this lump sum over the initial contract term, you'll have to pay interest again should you take out another loan. As a result, if you know you want to own the car at the end of the contract, Hire Purchase can be a more cost-effective option as, though you'll pay more each month, you'll pay less overall, as interest is building up more slowly.

Five tips for the lowest monthly payments with used car PCP finance

  1. Choose a used car with a low purchase price but a high optional final payment. Search through BuyaCar and order the cars that pop up by lowest monthly payment to see which models stand out.
  2. Where possible, pay a larger deposit to reduce the amount you have to borrow. The less you borrow, the lower your monthly payments will be, and the less interest you'll pay.
  3. Opt for a lower annual mileage limit, as doing this means the car you hand back should be worth more, shrinking your monthly payments. Make sure this is realistic, as declaring a lower figure than you actually cover could result in excess mileage charges at the end of the contract.
  4. Shop around for a lower interest rate (interest is charged on the whole amount you borrow with PCP and not just the difference between the initial price and predicted final value). Focus on improving your credit score to give yourself the best chance of being approved for finance and getting a good interest rate.
  5. Consider extending the loan term to cut the amount due every month, but bear in mind you will pay more interest overall by doing this.


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