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What is Personal Contract Purchase (PCP)?

PCP is one of the most popular types of car finance. Find out if you’re eligible, what you’ll be paying back each month and how to get great PCP deals.

Last updated on 14 December 2023 | 0 min read

Many new cars are bought on finance, with Personal Contract Purchase (PCP) being one of the most popular types on the market.
Here, we’ll talk you through the essentials of PCP so you can make an informed decision as to whether it’s the right option for you.

What is PCP?

Personal Contract Purchase, or PCP, is a type of car finance that allows you to drive a new vehicle without having to buy it outright.
PCP offers flexibility and lower monthly payments compared to traditional car loans – as 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 car back or exchange it for another PCP car without paying the balloon payment. As you may hand it back, your contract will include mileage limits and you could face charges for any damage outside of fair wear and tear. If you exchange it for another car, the finance provider may check you against their eligibility criteria again, as your circumstances may have changed.

What are the other types of finance and how do they compare?

Alternatives to Personal Contract Purchase (PCP)

Common alternatives are Hire Purchase (HP), car leasing, and personal loans. HP involves paying off the full value of the car in instalments, while personal loans provide a lump sum to buy the car outright.
The amount you pay per month, and the amount of interest charged on those payments, will vary so it’s important you shop around and find the payment plan that works for you. Always check the contract’s terms and conditions to make sure you understand what happens in the event of late or missed payments.

What’s the Difference Between PCP and HP?

There are a few key differences between PCP and HP. One of the main ones is that, once all payments are made, you own the car with HP (bar a nominal purchase fee to transfer the car’s title to your name and make you the legal owner). While with PCP, you have the option to buy the car at the end by making a balloon payment, but you could also hand it back to the lender (provided all outstanding charges are paid, and any issues with excess mileage or damage beyond fair wear and tear are resolved). Learn more on how PCP compares to HP.

How does Personal Contract Purchase (PCP) work?

With PCP, you essentially borrow money to buy a car, and then you pay it back in monthly instalments.
PCP contracts are calculated using a car’s Minimum Guaranteed Future Value (MGFV). This value 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. This is split into three key parts: • Deposit: You begin by paying a deposit as a downpayment. • Monthly Payments: You then make fixed monthly payments for a set period, usually between 24 to 48 months. • Balloon Payment: At the end of the agreement, you have the option to make a final payment in order to keep the car, known as the 'balloon payment,' which is a pre-agreed value based on the car's estimated worth at the end of the contract.

PCP example:

• 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.

Important things to be aware of with PCP

Do I own the car?

During the contract, you do not own the car outright. Instead, you are paying the finance company while they lend it to you. If the car has outstanding finance, you cannot sell it without the finance company’s permission – you can learn more about outstanding finance here.

PCP loan repayments

Unlike traditional loans, you're not repaying the full value of the car. Your monthly payments cover the car's depreciation, plus interest. If you want to buy the car, you’ll have to make a final balloon payment.

Being the car’s keeper vs the owner

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. 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 strict guidelines in the PCP contract, such as: PCP mileage limits Most PCP agreements have mileage limits, and exceeding these limits may result in additional charges. PCP maintenance, fair wear and tear You're responsible for the car's maintenance and it should be returned in a reasonable condition, accounting for natural wear and tear. If the car has damage beyond wear and tear when you return it, you may pay extra charges.

What happens at the end of a PCP agreement?

At the end of the PCP, you have three choices:
1. Hand the car back (subject to mileage and condition)
You can return the car and get a new one, but you’ll 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’.
If you plan to do return the car, it’s worth looking at all your options – including lease contracts to find out which is cheapest.
2. Buy the car by paying the remaining balance.
If you want to keep the car, you’ll need to make the balloon payment. There may also be a purchase fee. This can be an expensive option for buying the car outright, so compare this other options like Hire Purchase contracts.
If you do decide to buy the PCP car, explore your options and fine one that’s affordable for you – such as saving up and paying outright or taking out a loan or other finance agreement to pay the lump sum.
3. Start another PCP agreement for a different car.
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.

Should I get a car on PCP?

Who is PCP right for?

PCP suits those who prefer lower monthly payments and enjoy upgrading their car regularly. However, if you aim to keep the car long-term, other options like Hire Purchase might prove more cost-effective.

Can I get a used car using PCP?

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 are the drawbacks 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.

What are the benefits 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.

How do I get PCP finance?

Most dealerships offer PCP, and you can also approach banks, credit unions, and online lenders. Each provider will have their own criteria for acceptance and set terms and conditions, so make sure you research properly and find a finance agreement that works for you and that you can afford to pay.

Am I eligible for PCP finance?

Eligibility depends on a mix of factors including your credit score, income and expenditure, and existing debts. The value of the car you’re hoping to get will also factor in – make sure you can afford the monthly payments, and consider a more affordable car if needed.
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’ll have to provide proof of annual income to prove you can afford the repayments.

Do I need a credit check for PCP finance?

Yes, a credit check is typically required. When you apply for a PCP contract, the lender will perform a credit check. This will appear on your credit file, and too many checks in a short space of time can affect your credit rating so try to avoid that if possible. Learn more about credit ratings, and what to do if you have a bad credit rating.

Paperwork you’ll need to fill in for a PCP contract

For a standard PCP contract, you will need to provide proof of identity, address, and income. The finance provider will guide you through the necessary paperwork.
• 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. Learn more about applying for car finance.

Where can I get PCP finance from?

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.

Running a car bought on PCP

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 could be charged 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.

What happens if I miss payments?

For free, impartial advice on finances you can consult sites like Money Helper and Citizen's Advice.

Behind on PCP car finance payments?

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.
Missing payments can result in additional fees – the details will depend on the terms of your contract.
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.

Early termination

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.

Your rights for cancelling a PCP plan

You have the right to cancel within 14 days of signing the agreement. After this period, cancellation may incur charges.