Buying a car using a Personal Contract Plan (PCP)

Is a PCP the best way for you to fund a new-car purchase?

Words by: First published: 27th April 2015
PCPs help keep monthly payments low by deferring a lump sum (the balloon payment) until the end of the plan. You can then choose what to do next.
Pros of PCP:
  • You can drive around in a brand-new car every three years or so
  • The amount you pay each month is fixed, so you know precisely how much it’s going to cost you over the contract period
  • Some PCP agreements include servicing and maintenance
  • You can choose from a very wide selection of cars, and it means you can afford a more expensive car than you could with hire purchase (HP) or a loan
Cons of PCP:
  • Deposits tend to be higher than those needed for HP
  • Until you make the final balloon payment, you never own the car; you are leasing it from the finance company
  • If you go over your pre-arranged mileage limit, you may find yourself facing penalty charges if you want to hand the car back at the end
  • If you want to own the car at the end of the period, HP or a loan are probably a cheaper option
What is a PCP?
PCPs are becoming increasingly popular and are good if you want to change your car every two or three years. They are primarily associated with new cars, but are becoming quite mainstream for used cars, too.

As with a Hire Purchase agreement, PCPs are arranged through the dealer. However, deposits on PCPs tend to be higher: typically 20-30% of the car’s price.

The key difference is you don’t pay the total cost of the car. You just pay back the difference between the car’s sale price (when new), and what it is forecast to be worth at the end of the agreement.

This is known as the Guaranteed Minimum Future Value (GMFV), and it’s predicted using typical depreciation rates for the make and model, as well as taking into account your expected mileage.

PCPs allow you to keep your monthly payments low, although you still pay interest on the total amount you’ve borrowed, including the lump sum at the end.
At the end of the PCP, you have three choices:
  • 1. Give the car back to the dealer. This is usually an expensive way to ‘own’ a car and you’ll generally be better off leasing if this is your intention. Plus, you’ll have to pay an extra charge if you’ve gone over the agreed mileage limit.
  • 2. Pay off the balloon payment (and usually an optional purchase fee) and keep the car. Again, this is an expensive option if you want to buy the car outright, and HP may be a better bet if you want to own the car at the end. You can always take out a loan or other finance agreement to pay the lump sum.
  • 3. Start another PCP deal. If the dealer and finance company have done their sums right at the start of the agreement, your car should be worth more than the GMFV. You should be able to return the car to the dealer and can use any equity (GMFV versus market value) as a deposit to help reduce the cost of your next finance deal.
Top Tips
  • Dealers and manufacturers occasionally offer great deals on PCPs, including help towards deposits
  • PCPs work best if you want to start another one at the end, and if your car is worth enough to cover the balloon payment and contribute towards another deposit
Related topics:
New car finance