Finance a New or Used Car with Personal Contract Purchase (PCP)

Personal Contract Purchase (PCP) is one of the most popular forms of car finance. Many use it to buy a newer car they might otherwise be unable to afford. If you want to know more, you are in the right place. This guide takes you through every aspect of PCP car finance! 

What is Personal Contract Purchase (PCP) finance?

PCP finance explained: Personal Contract Purchase, or PCP for short, is basically a loan to assist you in purchasing a new or used car. It differs from other types of finance products in that you are not paying off the full value of the car. In fact, it is more like a long-term rental agreement, usually lasting 3-5 years. A PCP deal can be broken down into three main parts:

The Deposit – This must be paid at the start of the agreement and is usually around 10% of the car’s price. It is worth noting that some manufacturers offer ‘deposit contributions’ when buying a brand-new car, which can be a huge help! Remember, the bigger the deposit, the less you will need to borrow.

The Loan – You need to borrow the full value of the car from the finance company minus the deposit. But your repayments are not meant to pay off the full amount. The finance company sets the guaranteed future value (GMFT) at the start of the agreement. This is what they think the car will be worth at the end of the deal. You only make payments towards the car’s depreciation while you have it. So if you borrow £20,000 and the GMFT is set at £9,000, you are only paying off the £11,000 plus interest. 

Your monthly payment amount is set by the deal’s term, usually 24-36 months, minus the deposit you make plus any interest. Typical rates start around 5%. At the start of the deal, the lender/finance company will pay the full amount to the dealership. You then make payments to the lender/finance company that owns the car (you are the registered keeper).

The End of the Deal – At the end of a Personal Contract Purchase deal, the finance company will contact you with your options. You have three choices:

• Purchase the car: You don’t own the car at the end of the agreement. To own the vehicle, you must pay the GMFT (Guaranteed Minimum Future Value), also known as the ‘balloon payment’. 
• Hand the car back: You don’t need to pay this; you can simply return the car if you want.
• Trade-In: If the car is worth more than the GMFT, you can trade it in and use the extra as a deposit on a new PCP deal on another car. 

How does PCP Finance work?

PCP can be difficult to understand compared to other types of car finance. Our ninjas have put together an example to give you a clearer picture of how PCP breaks down:

1. You find a car you like that costs £10,000 and agree to a PCP deal over three years. The finance company calculates the car would be worth £4,000 at the end of the deal. 
2. You pay a 10% deposit (£1,000) with a loan for the remaining amount (£9,000).
3. You now owe the finance company £9,000, but the finance company has agreed the car will be worth £4,000 at the end of the deal, so you only need to repay £5,000 (plus interest on the total £9,000).
4. If your deal has an interest rate of 8.9% APR – based on the amount you are borrowing and the length of the term, your monthly repayments would be around £220.
5. At the end of the deal, you can pay the £4,000 to own the vehicle or choose to hand the car back/take out a new PCP deal. 

It is important to remember that you will not own the car until you have made the final ‘balloon payment’. The finance company remains the owner throughout the term of the deal.

Essential Aspects of PCP Finance

Because of the complexity of PCP deals, there are a few things you need to know before proceeding with an agreement:

• Always check the terms and conditions of the agreement before signing, as PCP deals often include mileage restrictions, excessive wear and tear damage, and cancellation or early exit fees. 
• You will not own the vehicle unless you pay the final ‘balloon payment.’ This means you cannot adjust the car in any way or sell it until you have made this payment. 
• You must pass a credit check before you can proceed with a PCP deal, and your credit score will dictate the interest rate you are offered. 
• Always check how much you are paying back monthly and in total. Low monthly payments can be misleading, as the large final ‘balloon payment’ can be significant. 
• Ensure you read the agreement carefully, as there could be extra fees and restrictions on usage. 

Alternative Finance Options

Knowing what you want from the deal is essential when applying for car finance. Are you likely to want to keep the car at the end of the agreement? If you are, then a Hire Purchase (HP) finance package could better fit you.

But there are plenty of different options you can choose from when it comes to financing a new or used car. It all depends on your own situation and what best fits you.

Broadly speaking, there are six options for purchasing a car that you can choose from:

(Turn landscape on mobile to view table below)

Cash Buy – If you wish to own the car from the start and take on no debt, then this is the obvious choice! You simply purchase the car with your own cash savings. It’s worth noting that if you do this with a brand-new car, the value in the first year will likely drop around 30-40%.

Hire Purchase – A Hire Purchase (HP) finance deal is similar to a standard loan, as you are borrowing and paying off the full cost of the car. You will not own the car until the final monthly payment has been made. The car is owned by a finance company that uses it as security against the loan. 

Like PCP, the dealership will be making money from the finance deal, so may offer larger discounts or contributions towards new cars. Always be careful to calculate the total cost and take interest into account. Head over to our Hire Purchase page for more information.

Car Leasing – This option has low monthly payments and is a great way to get behind the wheel of a brand-new car. However, it is essentially a long-term rental agreement; you will never own the car or have the option to purchase it. You will pay an initial deposit followed by monthly payments for the duration of the contract, usually over one to four years. 

Similar to PCP, there will be a mileage cap (e.g. 8,000 miles per annum), and you will be responsible for maintenance and upkeep of the vehicle. At the end of the deal, you simply return the car. You may be charged for extra mileage or any damage to the car. For more information, see our Car Leasing page.

Personal Loan – A personal loan is just as it sounds: you take out a loan for the cost of the car and purchase it outright, making you the owner from the start. You make monthly repayments to the lender until you have cleared your debt. These types of loans usually last between one to five years. It is important to remember that this loan is not secured against the vehicle.

0% Spending Credit Card – Depending on the cost of your chosen vehicle, a 0% spending credit card could be a good option. You’ll own the car outright and are covered by Section 75. However, not every dealership accepts credit card payments. 

The downside is that you will not know what credit limit you will be offered before applying, and you should make sure to pay off the debt before the 0% period ends (usually 25 months maximum), as interest rates shoot up after it ends.

What details will you need when applying?

This can vary from lender to lender, but there are documents and details that you will need to have to hand no matter who you apply to:

• Personal Information: You will need your full name, date of birth, and contact details (phone and email).
• Your Employment and Income: You will need your employer’s name and contact information, as well as recent payslips or proof of income (such as bank statements or tax returns). 
• Your Address Details: Lenders will require your full address, the length of time you have lived there, and, in some cases, whether you own or rent.
• Financial Information: Any details of existing financial commitments, e.g. credit cards, mortgage, etc. Lenders will usually ask you to undergo a credit check as well to see your credit score. This will determine the interest rate they offer you. 
• Vehicle Information: Make, model and registration of the vehicle you are looking to finance, including the cash price and the deposit you plan to put towards it.
• Proof of Identity: Such as a passport and proof of address (e.g. utility bills or council tax statement).
• Driving Licence: You must send a copy of your driving licence.
• Insurance Details: Some lenders may ask for proof of car insurance. 

Each finance provider will ask for slightly different things, always check for exact requirements, as some may ask for additional documents. 

Where can I get PCP finance?

There are two options here, the first being the dealership from which you buy the car. This is the simplest option, but it is rarely the cheapest. It is worth using an online broker to at least use as a comparison with the dealer’s offer.

Not able to continue? Your right to cancel your PCP deal

Taking out a PCP deal with the right length of term is important. If it is too long, you will pay more for the car, but if it is too short, your monthly payments could be too large to manage. If you are unable to keep up with repayments, or you’re simply looking to cut costs, you have the right under the Consumer Credit Act to return the car as long as you have made half of your payments. This is called ‘Voluntary Termination’. 

If you wish to pay off your PCP deal early, step one is to ask your finance provider for a settlement figure. You will need this amount of money to qualify for voluntary termination. You then have two choices:

1. Pay off the deal and keep the car
2. Pay off the deal early and sell the car

Behind on PCP finance payments? What to do:

If you find yourself behind on PCP finance repayments, you do have options:

• Check your options with your finance provider: Contact your lender and be honest about your current situation. Some lenders may be willing to offer a restructuring of your PCP deal, either extending the loan term, adjusting monthly repayments or offering a short-term payment holiday. These options may affect your credit score, but they are still preferable to defaulting on your agreement. 
• Consider handing back your car: As mentioned above, you can hand the car back before the deal is over, but only if you have made at least half of your repayments. 
• Part-Exchange: You could also consider part-exchanging your current vehicle for a more affordable model to reduce monthly payments. But you must consider an early settlement figure, so factor this into the cost. It may be more cost-effective to stay in the deal you are in. 

It is essential to communicate clearly and openly with your lender. They can only assist you if you are honest about your situation. They have procedures in place to help customers in financial difficulty. Ignoring the problem is never the answer; rather, you can face the financial challenges head-on with the help of your lender.

Our most asked questions on PCP finance | FAQs

Q. What are the benefits of PCP finance?

A. PCP finance is the most popular form of car finance, as it has lower repayments and allows customers to get newer vehicles.

Lower monthly payments than traditional car loans, the flexibility to choose what you do with the car at the end of the term, and no need to worry about the car depreciating are the best benefits of PCP. However, it is important to note that PCP car finance has risks. For example, you could owe more money than the car is worth if you keep it at the end of the term. Additionally, you may be charged extra fees if you exceed the agreed mileage allowance.

Q. How does a balloon payment work?

A. This is the amount you need to pay at the end of the agreement if you wish to own the car.

The balloon payment (or guaranteed future value) is the final amount you must pay to own the car at the end of the agreement. It’s typically a significant amount, so it’s important to consider your financial situation before entering into a PCP agreement.

Q. Can I only use PCP finance for new cars?

A. No, not at all!

No, you can finance a car that is a few years old with PCP finance as well. It is worth noting that the interest rates will be less competitive. This is due to cars losing a large chunk of their value in the first few years.

Q. How does car finance work?

A. Car finance is a loan used specifically for purchasing a new or used car. It involved repayments over a set period of time.

Car finance in the UK typically involves borrowing money to purchase a vehicle. There are a few different options to choose from, such as Hire Purchase, Personal Contract Purchase or Leasing.