Guide
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.
Words by: Andrew Woodhouse
Last updated on 31 July 2024 | 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.
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.
How Does PCP work?
With PCP, you essentially borrow money to buy a car, and then you pay it back in monthly instalments.
Unlike Hire Purchase, you don’t pay back the full value of the car in instalments with PCP. Instead, you pay 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. 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. 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.
Unlike Hire Purchase, you don’t pay back the full value of the car in instalments with PCP. Instead, you pay 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. 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. 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.
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 with 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.
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 with 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.
Things to be aware of with PCP
Now, let's talk about some important points on PCP:
• 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. • You don’t 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. • PCP agreements often come with mileage limits. Exceeding these limits can result in extra charges, so be mindful of your driving habits. • When returning the car, it should be in good condition, allowing for reasonable wear and tear. Excessive damage may result in additional fees. • Keep an eye on the interest rates offered with PCP deals. While they can be competitive, it's essential to understand the total cost of borrowing.
• 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. • You don’t 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. • PCP agreements often come with mileage limits. Exceeding these limits can result in extra charges, so be mindful of your driving habits. • When returning the car, it should be in good condition, allowing for reasonable wear and tear. Excessive damage may result in additional fees. • Keep an eye on the interest rates offered with PCP deals. While they can be competitive, it's essential to understand the total cost of borrowing.
How do I pay each month?
Your monthly PCP payments are fixed throughout the contract term, making budgeting straightforward. These payments cover the depreciation of the vehicle, as well as any interest charges.
The size of your deposit, length of your contract, and your annual mileage can affect the overall cost of your PCP agreement. You should also save up for your balloon payment if you intend to keep the car.
The size of your deposit, length of your contract, and your annual mileage can affect the overall cost of your PCP agreement. You should also save up for your balloon payment if you intend to keep the car.
What happens if I miss payments?
If you’re worried about missing payments, contact the finance provider immediately. They’ll be able to talk you through your options.
If you miss payments, you could face additional fees, a negative impact on your credit score and potentially repossession of the vehicle. Always seek guidance where you can. Money Helper and Citizen’s Advice can also provide free, impartial advice.
If you miss payments, you could face additional fees, a negative impact on your credit score and potentially repossession of the vehicle. Always seek guidance where you can. Money Helper and Citizen’s Advice can also provide free, impartial advice.
Can I terminate my contract early?
Speak to the lender about your options. You may be able to request a settlement figure. Paying this off means you can buy yourself out of the contract and keep the car.
If you are struggling to make payments, you could ask about Voluntary Termination. If you have paid 50% of the total amount payable (this includes monthly payments, fees, costs, interest and balloon payments) then you could hand the car back and terminate the agreement early. Details will be included in your finance contract. It is best to speak to the lender if you think you’re going to struggle making payments, as they may be able to offer help or support.
If you are struggling to make payments, you could ask about Voluntary Termination. If you have paid 50% of the total amount payable (this includes monthly payments, fees, costs, interest and balloon payments) then you could hand the car back and terminate the agreement early. Details will be included in your finance contract. It is best to speak to the lender if you think you’re going to struggle making payments, as they may be able to offer help or support.
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.
Learn more about your rights here.
Learn more about your rights here.
Running a car bought with PCP
Until you make the final payment, you are classed as the car’s legal keeper but not the owner, so you can’t sell the car. This is also true with HP, but rules are stricter with PCP contracts because you’re not guaranteed to own the car at the end, so the lender will want you to look after their property.
• You’ll need to make sure the car is insured and taxed properly. Most PCP contracts don’t include insurance, and require you to take out a comprehensive insurance premium. • 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 confirm. 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. If you go over the mileage limit, you could be charged for every mile you are over. Fair wear and tear, such as worn fabric on the seats, is fine, but if you decide to hand the car back or swap it, you’ll probably have to pay to repair 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. You might have to use an approved servicing centre and void your warranty if you don’t.
• You’ll need to make sure the car is insured and taxed properly. Most PCP contracts don’t include insurance, and require you to take out a comprehensive insurance premium. • 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 confirm. 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. If you go over the mileage limit, you could be charged for every mile you are over. Fair wear and tear, such as worn fabric on the seats, is fine, but if you decide to hand the car back or swap it, you’ll probably have to pay to repair 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. You might have to use an approved servicing centre and void your warranty if you don’t.
What are the other types of finance and how do they compare?
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.
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.
Should I get a car on PCP?
Pros of PCP
• You can drive around in a different car every few years.
• 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. • 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 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. • Some PCP agreements include servicing and maintenance. • Dealers and manufacturers occasionally offer great deals on PCPs, including help towards deposits.
• 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. • 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 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. • 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.
• 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.
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 spending, and any debts you have.
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.
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.
Do I need a credit check for PCP finance?
Yes, the lender will typically perform a credit check as part of your application. 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.
• 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.