What is PCP?

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PCP (Personal Contract Purchase) is a type of car finance that lets you spread the price of a desired car over a length of time.

pcp car finance

PCP finance is split into three parts

  • Deposit
  • Monthly payments
  • Final (balloon ) payment 

This can make running a newer/more expensive car more manageable as the monthly payments are usually lower than other types of finance. 

This is because  you only pay the depreciation, not the full value of the car, in your monthly payments. 

The depreciation is the difference between the initial cost of the car, and what the car is expected to be worth at the end of the agreement. 

The remaining amount is due as a lump sum known as ‘balloon payment’ or ‘Guaranteed Future Value’ (GFV) which you’ll need to pay if you want to keep the car and become the registered  keeper and owner of the car.

PCP finance is secured against the car, which means if you fall behind on your repayments, the finance company can take the car back from you. 

How does PCP work?

Before you start looking for a PCP deal, you’ll need to think about how much you need to borrow and over how long you want to pay it back – our PCP calculator could help you with that. 

You’ll usually have to pay a deposit to get a PCP deal, some no-deposit PCP   options are available but if you pay a deposit, the less you’ll need to borrow and there might be different rates available to you. At the start of the contract you’ll also need to agree on how many miles you plan to drive over the length of the contract.

After paying the initial deposit, or part-exchanging your car, with the dealer, the finance company/lender will pay the dealership for the car and then you’ll have to pay monthly payments for the agreed length of time (usually between one and four years). 

Once you have paid all payments except the final balloon payment, you’ll need to decide whether to:

  1. Pay the final payment and an ‘option to purchase’ fee to become the registered car owner
  2. Return the car to the finance company – you might have some additional costs to pay   if you’ve driven more than the agreed mileage; and if there’s damage of more than the agreed ‘wear and tear’ to the car
  3. Part exchange your car subject to settling off your existing finance and take out another PCP deal on new car. 

Which PCP deal is best?

You need to think carefully before you take out any finance, including PCP

  • PCP deals aren’t just available from car dealers, shop around for PCP deals at the same time you’re shopping around for cars
  • Compare a few different options and understand the different rates, monthly payments and balloon payments – our car finance checklist comes in handy for that
  • Reading customer reviews can also be handy when you’re comparing car finance options – here’s our car finance customer reviews
  • Make sure you can afford the planned monthly payments. Think about how you’d be able to make the monthly payments if your situation changed
  • If you think you’d like to own the car at the end of the PCP deal, think about how you’d pay for that lump sum/balloon payment .  

PCP pros and cons

If you’re still not sure if PCP is for you, here are some pros and cons:

Pros

  • Monthly payments are usually lower than Hire Purchase (HP) or an Unsecured Personal Loan (UPL)
  • Fixed monthly payments so you know exactly what you’re paying each month 
  • You know the minimum your car is guaranteed to be worth if you want to trade it in on a new PCP deal 
  • PCP is flexible - You have options at the end of the contract to hand the car back, or pay the balloon payment. Some lenders also give the option to trade in your car and take out a new PCP deal
  • As the payments are generally lower on PCP it may give you the opportunity to drive a more expensive car while still staying within your budget.

Cons

  • You don’t own the car until you have paid the final balloon payment, which means the car could be repossessed if you don’t keep up with your payments
  • You have to pay additional fees if you go over the pre-agreed mileage or if the car is not kept in good condition (other than normal wear and tear)
  • You usually need to pay a deposit
  • sTotal amount paid could work out more than the hire purchase or Personal loan once you’ve paid the balloon payment.

PCP vs HP vs Lease

If you’ve also heard of HP (hire purchase) and leasing/PCH (personal contract hire) and wondering what the difference is, here it is in a nutshell:

  • HP means you hire the car for an agreed length of time by paying monthly instalments. The total amount payable is spread evenly over the term of the loan. Once you’ve paid the ‘option to purchase’ fee, the car is yours. This usually means the monthly payments are higher than PCP, however, if you’re looking to keep the car at the end of the contract, you don’t have to find a large lump sum like PCP
  • Leasing is a long-term rental, you don’t get the option of keeping the car at the end of the contract. The other big difference is that leasing/PCH usually includes maintenance costs (e.g. servicing, tyres)  PCP and HP deals don’t include maintenance and servicing costs so you’ll need to budget for those costs on top of the finance costs.

 Read our car finance guide to compare all the different types of car finance

Which cars are people using PCP for?

A higher list price for a car doesn’t always mean higher finance payments. As PCP monthly payments are based on car depreciation, it can be a good option for cars that hold their value, where you are looking to change your car every few years. 

The top three cars bought on Admiral PCP Car Finance are:

  1. Land Rover Range Rover Evoque diesel
  2. Mercedes-Benz A Class diesel hatchback
  3. Ford Fiesta hatchback

To see which cars feature in the top 10 and why there’s a difference between the types of cars bought on PCP vs Hire Purchase, read our article on the top 10 cars bought on car finance

A car’s depreciation can affect whether you’re left in positive or negative equity at the end of your PCP deal, so it’s good to know how the car you’re planning to buy holds its value – our guide to cars that hold their value could help!

If you’d like to see some of the cars we’ve financed, take a look at these articles which will show you the deposit, monthly payments and balloon payments paid by some of our customers – so you can see some of this theory in reality!

What are my options at the end of the PCP agreement?

  • Give the car back: You can give the car back with no extra fees as long as the car
    • is in good condition
    • hasn’t exceeded the agreed mileage
    • has been serviced and maintained to the manufacturer’s recommendations. 
  • Keep the car: All you need to do to own the car is pay the balloon payment and option to purchase fee at the end of your agreement. 
  • Part-exchange for a new finance deal: With some car finance lenders, you can part-ex the car for a new finance deal. If the car’s worth more than the balloon payment you’ll have some extra equity to play with at the dealership. This option isn’t currently available if you take out PCP with Admiral.

Can I sell the car on PCP finance?

While a car is on finance, the owner of the car is the finance company, and any finance on the car would need to be settled to be able to transfer the ownership to you.   

If your car is on PCP finance and you want to sell it before the end of the contract, you might find yourself in negative equity.  This is due to the depreciation of the vehicle, which means you’ll need to make up the shortfall and pay the ‘balloon payment’, if the car is not worth enough to settle the loan.   

Also, not all finance companies will let you sell the car as it’s not yours to sell.

PCP jargon buster

The world of car finance is full of jargon and acronyms, we’ve listed some below that you might have come across:

  • APR/Interest: Interest rate is the amount/rate you’re being charged for borrowing money. APR stands for ‘Annual Percentage Rate’ it takes into account the interest, any additional costs associated with the finance, such as initial fees and any compulsory charges. So if you see a difference between the interest rate and APR on a PCP deal, it will be because of the fees/charges. 

You may see a Representative APR being advertised.  This is to help customers to compare products on a like-for-like basis. the Representative APR rate is the rate that the lender expects 51% of customers get offered.  

The actual APR offered you will get offered, depends on individual circumstances and without any information about your credit history or financial situation, it would be hard to work out an accurate rate upfront. Read more here about APR.  

  • Depreciation: This is how much the car will reduce in value over time
  • Mileage limit: This is set at the start of your finance agreement. if you go over the agreed mileage limit, and hand the car back, the finance company will charge you for every mile you are over
  • Guaranteed Minimum Future Value (GMFV): This is the amount the finance provider guarantees to pay if you want to hand in your car or trade it in on a new PCP deal. It depends in part on the number of miles you’ve done, the vehicle’s condition and is serviced and maintained to the manufacturer’s recommendations. This is calculated by taking into account the term of the agreement, the anticipated mileage and the type of vehicle and specification
  • Balloon Payment/Optional final payment: This is the amount you will pay at the end of your finance agreement if you want to buy the vehicle. This will be generated at the point of sale, along with the GMFV
  • Deposit: This is the amount you put down at the start of the agreement. The higher the deposit, the   less you’ll need to borrow, so your monthly instalments will be lower. The deposit amount doesn’t affect the balloon payment. 

We recently surveyed people on whether they knew what some car finance jargon meant, take a look at our results and video to see what we found.

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