How PCP Finance Works

What is PCP Finance?

Personal Contract Purchase (PCP) is one of the most popular ways to finance a new or used car in the UK. It's a type of hire purchase agreement that offers lower monthly payments than traditional car loans because you're not paying for the entire value of the car.

How Does PCP Work?

PCP finance works in three main parts:

1. Deposit

You typically pay a deposit at the start of the agreement, usually between 10% and 30% of the car's value. Some dealers offer deposit contributions to help reduce this initial payment.

2. Monthly Payments

You then make fixed monthly payments over a set period, usually 24 to 48 months. These payments are lower than traditional financing because you're only paying for the depreciation of the car during your ownership period, plus interest - not the car's full value.

3. Final Balloon Payment (Optional)

At the end of the agreement, you have three options:

• Pay the final balloon payment (also called the Guaranteed Minimum Future Value or GMFV) to own the car outright
• Hand the car back with nothing more to pay (subject to mileage and condition terms)
• Trade in for a new car on a new PCP agreement, using any equity (if the car is worth more than the GMFV) as a deposit

Key Terms in PCP Finance

Guaranteed Minimum Future Value (GMFV)

This is the predicted value of the car at the end of the agreement, which forms the basis of the optional final payment.

Annual Mileage Limit

PCP deals come with a pre-agreed mileage limit (e.g., 10,000 miles per year). Exceeding this will result in excess mileage charges if you return the car.

APR (Annual Percentage Rate)

This represents the total cost of the credit, including interest and any mandatory fees.

Deposit Contribution

A sum of money offered by the dealer or manufacturer to reduce your initial deposit.

Advantages of PCP Finance

• Lower monthly payments compared to traditional car loans or hire purchase
• Flexibility at the end of the agreement with three options
• Drive a newer car that might otherwise be unaffordable
• Fixed payments make budgeting easier
• Possibility to include maintenance packages for complete peace of mind

Disadvantages of PCP Finance

• You don't own the car until you make the final balloon payment
• Mileage restrictions with charges for exceeding the limit
• Potential charges for excessive wear and tear if you return the car
• Early termination can be expensive
• Total cost is typically higher than paying cash outright

Is PCP Right for You?

PCP might be suitable if:

• You want lower monthly payments
• You like to change your car every few years
• You're comfortable not owning the car during the agreement
• You can stay within the agreed mileage limits
• You take good care of your vehicle

PCP might not be suitable if:

• You want to own the car outright from the beginning
• You drive high mileages
• You want to modify the car
• You want to keep the car for many years

Using Our PCP Calculator

To get a better understanding of what a PCP deal might cost you, try our PCP Finance Calculator. You can adjust variables like:

• Car price
• Deposit amount
• Term length
• Interest rate
• Anticipated final value

Our calculator will show you the estimated monthly payments and total cost of the finance.