What is Personal Contract Purchase (PCP) finance?

Looked at car finance options lately?

Chances are you will have noticed personal contract purchase (PCP) agreements – and the low monthly payments they allow.

They usually have smaller monthly repayments than hire purchase (HP) agreements, but they cost less per month for a reason – you’re not paying off the whole value of the car, which means you either buy the car outright at the end of the agreement, or hand it back. You end up paying money for the car without actually owning it, and are essentially only paying for the depreciation.

They’re not the reserve of low-end volume manufacturers either. Although you can get a Dacia Duster on a PCP plan, you could also sign up for an Audi R8 too, if you wanted to.

Car manufacturers like to offer PCP deals because they help more people afford their cars, and the majority of PCP customers will trade their cars in for another of the same make.

But that said, PCP finance can still be a good option. How come? Read on to find out or, if you’ve already picked your perfect new car, use our PCP calculator to get a better idea how much it could cost.

PCP in practice

You start by picking the car you want from a dealer. It doesn’t matter which dealer, because all brand-approved main dealers (such as all carwow’s trusted dealers) will offer the same PCP interest rates. So the interest rate you’re offered by one Ford dealer, for example, will be the same as any other Ford dealer.

You then agree the length of your PCP (usually between one to four years), and your annual mileage limit. Go over this mileage limit and you’ll have to pay an extra mileage charge at the end of the term – make sure you check how much extra this is before you sign the paperwork.

Then you pay a deposit, drive your shiny new car home and start paying your fixed monthly repayments. The size of the monthly repayments will depend on the value of the vehicle and the interest rate on the PCP agreement. Because you’re not paying off the entirety of the car’s value, your monthly cost will be lower than on HP agreements.

What happens when my PCP agreement ends?

When a PCP agreement ends, you don’t actually own the car (like you would with HP), but have the choice to buy it for a pre-agreed price – called the Guaranteed Minimum Future Value (GMFV) – or to hand it back. You can also trade it in against another car.

The GMFV is decided when you take the agreement out, so you always know how much you’ll have to stump up to keep the car when your agreement ends. It could also be handy if the used car price of your vehicle drops considerably during your ownership – after all, it’s guaranteed (as long as you keep the car in good condition and don’t go over your mileage allowance).

The GMFV will take into account fair wear and tear, but it’s in your interest to keep your car in tip-top condition during the PCP agreement, just because it’ll mean your car is more likely to be worth more at the end of the term.

To buy the car outright at the end of your PCP (for the GMFV) you can pay a lump sum, or re-finance it.

If the car’s trade-in value is higher than the GMFV, you can use the difference towards a deposit for your next car. For example, the GMFV of your car is £8,000, but the trade-in price is £10,000. This gives you £2,000 that will go towards your new car. This is another reason PCPs are popular: they let you switch between new cars regularly, without much hassle.

PCP in a nutshell

Sound complicated? PCPs aren’t as simple as straight HP, where you pay off the car in chunks until you own it. The diagram below shows how PCPs work. By the end of the agreement, you’ll have paid for the blue and orange portions of the car. Here, you either hand the car back, trade it in or pay off the red section and become the legal owner of the car.


Do your research

Before taking out a PCP agreement, make sure you’ve considered which of the three final outcomes you’re going to opt for – as long as you stick to your mileage allowance and keep your car in good condition, you shouldn’t have any nasty surprises.

Give the car back to the finance company and walk away. This means you’ve essentially rented the car for your monthly payment.Buy the car – either as a lump sump or by financing the remainder of the outstanding amount.

Trade the car in, using any difference between the GMFV and trade-in price as equity towards the new car. The dealer takes care of the finance payout, which means less hassle for you.

Want to know more about finance?

Use the carwow finance guide to find out more about new-car finance options, including hire purchase and leasing or check out our PCP calculator to get a better idea how much your new car could cost.

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