The majority of new and nearly new cars sold annually in the UK are financed, with PCP (Personal Contract Purchase) being the most prevalent option. PCP has surged in popularity, with around 80% of new cars and a growing number of used vehicles being purchased through this method. However, understanding PCP can be complex, which is why our guide aims to demystify the process and help make informed decisions when buying a car.

While PCP can offer the allure of acquiring a better vehicle at a lower monthly cost for some buyers,it’s important to be aware of potential expenses and penalties associated with ending the agreement prematurely. Before committing to a PCP agreement for the next three to five years, it’s advisable to thoroughly comprehend the intricacies of PCP car finance to ensure you secure the best possible deal.

What is it?

PCP finance, short for Personal Contract Purchase, combines aspects of vehicle leasing for personal use with the traditional method of buying through regular installments. This approach has become widespread, evident in new car advertisements emphasising monthly payments rather than the total purchase price. Originating in the late 2000s due to tax changes affecting company cars, PCP quickly gained popularity among smaller businesses and the general public, driving a surge in new car purchases. This trend benefited consumers, manufacturers, and premium brands alike, particularly for vehicles like SUVs.

Unlike traditional financing, PCP involves an initial deposit and lower monthly payments, with the option to make a final ‘balloon’ payment for total ownership or return the car to the dealer for a new model, potentially from the same manufacturer. The decision at the end of the agreement hinges on the Guaranteed Minimum Future Value (GMFV), determining whether to use any equity toward the next purchase or simply return the vehicle. Statistics show that around 80% of PCP customers opt for a new deal, while 20% choose to settle the final amount for ownership.

When considering PCP, it’s essential to evaluate your car’s valuation and decide whether to sell it online or use it for part-exchange at the dealership, depending on what makes the most financial sense for you.

Is PCP a good idea?

The suitability of PCP car finance hinges on individual circumstances. If you desire a new car every few years and are willing to stick with the same manufacturer, PCP offers a cost-effective means to access modern vehicles. However, adherence to terms and condition, such as mileage limits and manufacturer service requirements, is crucial to avod penalties upon returning the car. 

Despite enticing PCP deals, it’s essential to remain realistic about your budget. If your preference is to outright own your car at the end of the finance term, PCP may not be the optimal choice. Apart from facing a sizable final payment and potential changes in personal circumstances, you also assume the risk of fluctuating used car values affecting the accuracy of the GMFV. For further insights into car value fluctuations over time, refer to our comprehensive guide on car depreciation.

How does PCP work?

A typical PCP car finance deal operates similarly to traditional hire purchase or vehicle lease arrangements, with the added option of a final balloon payment if you choose to retain ownership pf the car. There are three main components to a standard PCP agreement : 

1. The Deposit : An initial payment, usually around 10% of the total new value of the car, is required to initiate the PCP deal. Some manufacturers may offer a ‘deposit contribution,’ typically ranging from £500 to £2000 or more, which reduces the amount you need to save before purchasing a new car.
2. The Loan Amount : This is the borrowed sum that you repay monthly over the agreement’s term. It’s determined by the expected depreciation of the vehicle and the Annual Percentage Rate (APR) interest on the loan. APR rates typically range from 4-7%, but can be higher, especially for used cars. It’s important to scrutinise low or 0% APR deals to ensure they don’t compensate for the interest through higher initial deposits or final payments.
3. The Final Payment : Known as the balloon or Guaranteed Minimum Future Value (GMFV), this payment is made at the agreement’s end if you opt to keep and own the car. It represents the agreed expected value, which may yield equity if you transition to a new PCP agreement, or incur a loss if the car’s value has depreciated more than anticipated.

Additonally, before committing to a PCP deal, it’s crucial to review the terms and conditions regarding mileage limits can result in additional charges, typically between 7-10p per mile over the agreed limit. It’s also wise to verify if expenses like car tax are covered initially to avoid unexpected costs.

APR Rates

Typical APR rates are influenced by the UK economy, financial market conditions, and individual financial history and credit rating. Even slight variations in rates can lead to significant differences in monthly payments, underscoring the importance of thorough research.

Exploring options like 0% deals, larger deposits, and manufacturer contributions can potentially yield substantial savings, potentially amounting to thousands of pounds. For instance, low APR rate around 3.2% on a £10,000 loan over 36 months would result in total repayments of £10,493.64. 

Conversely, a moderate APR rate of approximately 12.1% for the same loan amount would increase the total cost to £11,867.40. 

Conversely, signing up for a high APR rate of 38.49% could result in total repayments on £15,881.76, highlighting the significant impact of interest rates on overall loan costs.

Look out for

When evaluating PCP car finance deals, consider the following key factors : 

1. Deposit Amount : Determine if you can benefit from a manufacturer contribution or save money by opting for a larger deposit.
2. APR Rate : Assess the interest rate on the loan amount and final repayments. Compare different APR rates to determine if you’re saving overall or potentially overspending.
3. Final GMFV Amount : Evaluate if the GMFV of your car is realistic at the end of the agreement. Consider potential fluctuations in used car values that could impact your financial position.
4. Agreement Conditions : Review the terms to ensue you won’t exceed mileage limits or make modifications that could result in additional costs when the agreement concludes.
5. Insurance : Understand how car finance coverage aligns with the agreed value of the car in the event of theft or write-off. Consider gap insurance to bridge any shortfall between the insurance payout and the original sale price or outstanding finance amount.