Personal Contract Purchase (PCP) is one of the most popular methods of buying a car on finance.
PCP agreements work in a similar way to other personal loans or car finance options (like Hire Purchase). You pay a deposit, then take out a loan for the remaining amount – which you pay back monthly with interest.
PCP does work slightly differently in some respects, which we’ll cover here.
For example, you don’t just pay back your monthly instalments. A portion of your PCP loan is left until the end of the contract – at which point you have the option to clear the remaining balance with one large final payment (called a balloon payment) and own the car outright. Alternatively, you can hand the back or exchange it for another PCP car without paying the balloon payment.
As you don’t own the car, and may never own it, your contract will include mileage limits you’ll have to stick to. You’ll also have to keep the car in good condition and could face a charge for any damage outside of fair wear and tear.
PCP contracts are calculated using the Minimum Guaranteed Future Value (MGFV) of a car. This is how much the lender projects the car will be worth at the end of the contract, based on typical depreciation rates for the car’s make and model, your expected mileage and other factors.
In a PCP contract you’re not paying back the full value of the car in instalments - you’re just paying back the difference between the car’s original price when new, and what it's forecast to be worth at the end of the agreement.
• You take a three-year PCP contract on a car worth £30,000. • You have a 10% deposit of £3,000, so you need a loan for the remaining £27,000. • The car’s MGFV is £15,000 (most cars lose 50% to 70% of their value in the first three years). • As the car will only be worth £15,000 at the end of your contract, you’re paying off the difference between what it’s worth now and what it will be worth: £12,000 in 36 instalments, plus interest and charges. • At the end of the contract, you’ll pay back the remaining £15,000 if you want to buy the car. Otherwise you return the car or swap it for a new one.
This is a key difference to HP or Conditional Sale agreements, in which you’re paying off the full cost of the car (you pay back £30,000 in 36 equal instalments).
This usually means PCP monthly payments are smaller than those in a HP contract. But remember: if you plan on buying the car at the end you should be saving towards the balloon payment, so factor in the monthly repayments and the amount you’d need to put aside each month for a more accurate comparison.
The MGFV will vary between cars, trim levels and engine sizes. You’ll pay monthly for the duration of your contract, usually for 24 to 48 months (two to four years). The MGFV can also be affected by the length of your contract and the car’s mileage at the end of the contract. The higher the mileage, and the older the car, the less valuable it will be at the end of the contract and so the more you’ll have to pay each month.
So that’s what you’re paying back. Let’s look at how you pay it.
There are four key parts to a PCP loan:
This is usually 10% of the car’s total price, but the deposit required can vary greatly. Some PCP deals don’t require a deposit at all. Sometimes, manufacturers offer ‘deposit contributions’ towards new cars if you sign a car finance agreement with them directly.
As a rule, the larger a deposit you put down, the less you’ll have to borrow and so the smaller your monthly payments will be. Just be aware that taking out a longer contract could result in you paying more interest, which we’ll cover next.
The loan (plus interest).
This is the amount of money you’ll pay back each month. As covered above, you’re technically paying off the amount the finance lender predicts the car will lose in value over the length of the contract, minus your deposit.
Your loan is paid back over a fixed period of time – anything between 12 months and five years, but most commonly two to four years.
Your payments are also likely to include a rate of interest, (although some manufacturers do offer 0% finance deals on selected models) and also that you’re paying interest on the total price of the car, not just the amount you’re borrowing. Typical APRs are between 4% and 7%. The APR or ‘Annual Percentage Rate’ given by the lender is the interest rate plus any additional fees or costs. This may help you compare different finance offers.
This will vary in each case – it’s how much the finance company expects your car to be worth at the end of your contract (the MGFV).
The balloon payment will be agreed at the start of your contract, so you’ll have opportunity to save up for it as you go. You’ll only pay this if you plan on keeping the car. If you want to swap the car or return it, you won’t need to make the balloon payment.
You may have other optional fees, such as GAP insurance, that you may need to account for.
PCP contracts can be worth considering if you want to change your car every two or three years, or if you’re unsure whether you want to own the car at the end of the agreement or not.
PCP contracts usually have low monthly payments and tend to work best if you want to start another PCP contract at the end – especially if the car is worth enough to cover the balloon payment and contribute towards another deposit.
PCP contracts are mostly used for new car finance but can also be used to finance a used car purchase.
Pros of PCP:
• The amount you pay each month is fixed. • Buyers tend to pay less each month than in other finance methods, meaning you could get a car that’d otherwise be out of your budget. • You don’t have to commit to buying the car, you can trade it in or hand it back at the end of the contract. • You can choose from a wide selection of cars, and you could access a more expensive car than you could with hire purchase (HP) or a loan. • You can drive around in a different car every few years. • Some PCP agreements include servicing and maintenance. • Dealers and manufacturers occasionally offer great deals on PCPs, including help towards deposits.
Cons of PCP:
• Deposits tend to be higher than those needed for HP. • Until you make the final balloon payment, you don’t own the car; the finance company own it and you are classed as the car’s legal keeper. • If you go over your pre-arranged mileage limit, you will likely be charged if you want to hand the car back. • If you damage the car, you might be charged for repairs. • If you want to own the car at the end of the period, Hire Purchase or a personal loan is often a cheaper option. • Sometimes, a dealer may offer a 0% APR deal to tempt you, but some are too good to be true, and the money will be found from elsewhere i.e. a bigger balloon payment, or big charges for excess mileage or minor damage.
Different lenders have different eligibility criteria, so check with various lenders to see if you’re likely to be accepted before applying and ask any questions you may have.
In most instances, drivers between the ages of 18 and 79 are eligible for a PCP contract.
You’ll need an up-to-date credit history report and other documentation such as proof of address, proof of income, ID, and personal details such as your legal name and address.
If you do not have a job, you may still be eligible for PCP finance – you’ll have to provide proof of annual income to prove you can afford the repayments.
Do I need a credit check for PCP finance?
When you apply for a PCP contract, the lender will perform a credit check. This will appear on your credit file as an application for credit – too many checks in a short space of time can affect your credit rating so try to avoid that if possible.
Paperwork you’ll need to fill in for a PCP contract
For a standard PCP contract, you will need to provide:
Personal details including your full name (and any previous names), date of birth, marital and residential status (whether you live with parents, rent or own a home), and full address history for the last three years.
Employment details including the names and addresses of all employers in the last three years (or longer if you have gaps in your employment history or change jobs often), plus job title and proof of salary. If you’re self-employed, you’ll need to provide proof of income – such as accounts.
Bank details including the branch address, sort code and your account number. If you’ve changed banks in the last three years, you may need to provide details on all accounts in this time period.
If you don’t have three years’ worth of documents, don’t worry – the finance company may be able to help. Try to provide as much as you can.
Try to arrange your paperwork in advance so that your application goes smoothly, and you don’t have to worry about finding any documents – you can instead focus on the details of your contract and make sure you can afford the monthly repayments.
PCP contracts can be found and arranged through the dealer, the manufacturer or through an online provider. Auto Trader act as a credit broker, which means we don’t offer finance ourselves. Instead, we make it easy for you to apply directly with the retailer.
Online finance providers
PCP deals are available from lenders and brokers, who can give you a good idea of prices and monthly repayment figures. At Auto Trader, we partner with Zuto, who provide finance quotes for vehicles listed on our site.
If you use a broker, ask whether they’ll perform a hard or soft credit check. A hard credit check will show as an application on your credit report, even if you don’t take out the loan. Too many of these in a short space of time can be red flag to other lenders.
Also known as forecourt finance, there are two main types of dealer finance: • Franchised, which is related to a specific manufacturer e.g. Audi • Independent, which is offered by the independent dealer
Sites like Auto Trader allow you to compare finance deals from dealers across the UK. We allow you to search by monthly price, meaning you could find a great deal a bit further away from home.
Until you make the final payment, you are classed as the car’s legal keeper but not the owner. As such, you can’t sell the car as it’s not your property. See: cars with outstanding finance.
This is also true with HP, but rules are stricter with PCP contracts. This is because you’re not guaranteed to own the car at the end so the lender will want you to look after their property. As such, you can expect mileage limits in your contract as well as strict guidelines on the car’s maintenance and servicing.
Tax and insurance on a PCP car
As the car’s keeper, you’re responsible for its upkeep – this includes making sure the car is insured and taxed properly. Some PCP contracts will include insurance, but most don’t so always check your contract and arrange insurance if you need to. You may be required to take out a comprehensive insurance premium, as the car belongs to the lender, and this can prove expensive so factor this into your budget.
You’ll also be responsible for the car’s annual MOT if it’s over three years old, and any servicing required.
Some PCP contracts may require you use an official partner for servicing, especially if your contract is with the manufacturer, so check the small print to see if this is the case.
PCP mileage limits
At the start of your contract, you’ll set a mileage limit – this is how far you’ll drive the car each year, or each month.
As mentioned above, the mileage limit helps set the MGFV. A car with a high mileage will be worth less at the end of the contract than one with a low mileage, therefore low mileage contracts tend to be cheaper each month.
That said, don’t underestimate your mileage just to try and pay less each month. If you go over the mileage limit, you’ll be charged between 7p and 10p per mile for every mile you are over. This can quickly add up, so try to be accurate in your predicted mileage to avoid the added cost.
PCP maintenance, fair wear and tear explained
Until you make the final payment, you’re not the car’s owner – the PCP lender is. As such, you’ll need to take good care of their property.
If you decide to hand the car back or swap it, the car will need to be in good condition. Fair wear and tear, such as worn fabric on the seats, is fine, but you’ll likely be asked to pay to repair on large scratches, dents or other damage on the car.
If you damage the car while driving it, check your contract as to where you can go for repairs. If you’ve got a deal with the manufacturer, they may stipulate that you visit an approved servicing centre. Failure to do so could void your warranty.
If you plan to do this, you may be better off leasing as it will likely work out cheaper. You’ll also have to pay an extra charge if you’ve gone over the agreed mileage limit, or if there’s damage on the car over and above what the lender would consider to be ‘wear and tear’.
2. Buy the car by paying the remaining balance.
You’ll make the balloon payment, and usually an optional purchase fee which can be up to £500. This is an expensive option if you want to buy the car outright, and HP may be a better option if your intention is to own the car. You can take out a loan or other finance agreement to pay the lump sum.
3. Start another PCP deal.
This is the most common option. If the car is worth more than the outstanding finance, you can use that ‘equity’ as deposit on a PCP deal for a new car. However, if you hand back the car and don’t take out another PCP, you don’t get to keep the extra cash. If the car isn’t worth more, the finance company takes the hit, and the sensible option would be to hand the car back.
If you wish to end the agreement, you can request a settlement figure from your finance provider to buy yourself out of the contract and keep the car.
If you are struggling to make payments, another option is Voluntary Termination, where if you have paid 50% of the total amount payable (including monthly payments, fees, costs, interest and balloon payments). You can hand back the car and terminate the agreement early. Details of this will be included in your finance contract.
It is best to speak to the lender if you anticipate you may struggle to make payments in the future as they may be able to offer alternative arrangements.
With the other popular type of finance, called Hire Purchase (or HP), your monthly payments are based on the full cost of the car plus interest. That makes the payments comparatively expensive, but on the other hand, there’s no final balloon payment and (provided you keep up your payments) you always own the car at the end.
You can get used cars on PCP, but the interest rates may be higher. As used cars have already depreciated in value, dealers don’t stand to get much back at the end of the contract. As such, dealers will make their money off the interest rates.
What happens if I miss a payment?
If you’re struggling to make payments, speak to the lender about your options. They may be able to help by offering alternative payment plans.
If you keep missing payments, you may be marked as a default by the lender. If this happens, it can negatively affect your credit rating and the lender may repossess the car. A default can make it harder for you to get a future loan or mortgage.
Do I need gap insurance?
If you have an accident or the car is stolen, your insurer will only pay out against the amount the car is worth at that time.
Gap insurance policies can get you back to the original sale price of the car and help cover the amount you have outstanding on finance – which could be more than the car is worth due to the curve of depreciation.
Gap insurance isn’t mandatory, but it can offer peace of mind. As always, it’s worth shopping around for quotes for a good price.