What is Personal Contract Purchase (PCP) finance?

PCP (Personal Contract Purchase) finance can split the cost of a new car into a deposit and a series of monthly payments. Once your finance term is up – commonly between two and four years – you can return the car to the dealer or keep it by paying an optional final payment – sometimes called a ‘balloon’ payment.

This is where PCP differs from Hire Purchase (HP). A portion of the car’s value will be deferred to an optional final payment – only if you choose to pay this amount will you be the car’s legal owner. The size of your monthly payments will depend on the how much deposit you pay, how long you’d like to keep the car for and how many miles you intend to cover. If you’d rather pay a larger deposit or plan to only use the car rarely, your monthly payments should be lower than buyers who paid a smaller deposit or who cover high mileages.

What’s the difference between PCP and HP finance?

Unlike HP finance, the amount you’ll pay for a PCP agreement doesn’t cover the whole cost of the car. As a result, you’ll be expected to return the car to a dealer at the end of your finance term or pay an optional final payment if you’d rather keep it. For this reason, PCP monthly payments are often slightly cheaper than comparable HP finance payments.

PCP deals are offered by pretty much all mainstream manufacturers on cars ranging from the affordable Dacia Sandero to high-performance sports cars such as the Audi R8. It’s also worth noting each manufacturer-backed dealership – including carwow’s network of trusted dealers – will offer the same interest rates on their PCP deals from the manufacturer finance company.

PCP finance in practice

Once you’ve picked the perfect car in your ideal specification, you’ll need to agree the length of your PCP finance term and a mileage cap with your dealer. Using these values, they’ll predict how much the car will be worth at the end of your agreement (often called the Guaranteed Minimum Future Value or GMFV) and calculate your monthly payment and deposit amount accordingly.

If you exceed the mileage limit or return the car in poor condition, the dealer will charge you a fee to cover refurbishment costs considered in excess of ‘fair wear and tear’. These rules generally follow industry guidelines from the British Vehicle Ventral and Leasing Association (BVRLA) and should be available from your dealer or finance company. If you plan to keep the car, the final payment amount will not be affected, however – you’ll still have to pay the amount set out in your contract. We’d strongly suggest reading your contract closely so you’re familiar with the specific requirements you’re agreeing to.

What happens when my PCP agreement ends?

Unlike HP agreements, you won’t automatically own the car once you’ve made your final PCP payment. Instead, you can return it to the dealer or buy it outright by paying an optional final payment. This can be paid in cash as a lump sum or you may be offered the option to refinance this amount.

We advise you to keep your car in tip-top condition or you may find the dealer will apply another penalty charge. If you decide to buy it outright, however, you’ll only have to pay the amount set out in your contract, regardless of its second-hand value.

If your car ends up worth more than its GMFV, you could trade it in for a new model, using the equity towards a deposit on the new car. For example, if your car’s worth £10,000 but the GMFV is only £8,000, you could trade it in and use its £2,000 equity towards a new car. You shouldn’t plan on having equity in your car at the end of your agreement – it’s not guaranteed and is subject to market conditions. If the car’s worth less than the GMFV when you return it, the dealer and finance company will assume responsibility for this loss.

Do your research

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

As with all forms of personal finance, you should carefully consider whether you can afford the monthly payments before you sign a contract. Cash purchases will always be an alternative and could suit your individual circumstances better.