What is Personal Contract Purchase?
Personal Contract Purchase (PCP) is a type of car finance that allows you to spread the cost of the purchase over a period of time, before giving you the opportunity at the end of the deal to either pay a lump sum - known as a "balloon payment" - in order to keep the car, use any equity to start a PCP arrangement on a new car or walk away altogether.
PCP is a popular way of financing a car purchase as the monthly payments tend to be lower than with other options. This is because the amount you pay back is equivalent to the amount the finance company believes the car will depreciate over the course of the finance deal, minus the deposit you pay. We will explain this in more detail in the next section of this article, but it's important to note that you won't own the car at the end of the finance deal, unless you make the balloon payment.
How does Personal Contract Purchase work?
PCP is more complicated than other forms of finance as it requires a number of calculations to work out how much you will have to repay, and when. It includes:
- The deposit: You will typically have to contribute at least 10% of the car's value as a deposit. If you have impaired credit, you can expect to pay considerably more. For new cars, some dealerships will offer to contribute towards the deposit if you agree to take out their finance
- The amount you borrow: The difference between PCP and Hire Purchase (HP) is you don't pay the whole cost of the car across your monthly payments. Instead, the amount you borrow is worked out by the finance company assessing how much they think the car is going to be worth at the end of the finance period, which is known as Guaranteed Future Value (GFV), minus the deposit you pay.
- The balloon payment: If you want to keep the car at the end of the finance deal, you will have to pay the GFV as a lump-sum payment. After that, you will own the car outright.
PCP payment example:
- Car price - £15,000
- Deposit - £1,500
- GFV - £11,000
- Total loan amount - £9,500
- APR - 5%
- Loan term - 2 years
- Monthly repayment - £433
- Balloon payment to keep the car - £4,000
How is Guaranteed Future Value calculated?
The GFV - also known as the Guaranteed Minimum Future Value (GMFV) - is based on the estimated worth of the vehicle after that finance period has been completed, which tends to be between 1-5 years. In effect, it aims to work out how much depreciation there is likely to be over that time. This will be based on:
- The make and model of the car
- The age of the car - brand-new cars suffer greater depreciation than nearly-new
- The annual mileage the car is likely to do
Interestingly, the GFV is often on the conservative side, which means the car is actually worth more than the balloon payment at the end of the deal. However, you are not able to take that additional equity if you decide to walk away without making the balloon payment. The only way of utilising it is to move the equity on to another deal on a new car, which is the choice most people make.
Keep in mind that, if the actual value is the same or lower than the GFV and you don't want to keep the car, you will need to find the money for a deposit to finance a new car.
Where can I get PCP from?
PCP from a dealership
Most people will get PCP finance from the dealership where they buy the car. This may be from a franchised dealership for a specific manufacturer, from an independent dealership or from a car supermarket. Finance deals can vary between dealerships even for the exact same make, model, age and mileage car, so it pays to shop around.
As discussed above, some dealerships will offer to pay part of your deposit or provide interest-free credit on the loan if you buy a new car using their PCP finance deal. You will need to assess whether this perceived saving is actually being priced back in elsewhere, perhaps with you not being able to negotiate a discount on the car or with the balloon payment being higher than it otherwise would have been.
PCP from an online broker
As well as getting a PCP finance deal from the dealership, you can also find websites such as confused.com and carbase.co.uk which can source deals from a number of different lenders. It provides a good way of finding the best and cheapest deals, rather than simply accepting the finance offered by the dealership. It can also be a good option if you have special requirements, for example, if you have impaired credit or want a longer-than-standard loan period.
Avoid asking for quotes from a large number of the lenders the online broker provides you with. If they run a "hard" search on your credit file, this will be visible to other lenders and could negatively impact your credit score. It is a good idea to check whether they can run a sot search instead, which won't leave a footprint on your credit file.
Some of the major high-street banks also offer PCP finance to existing current account holders. These tend to be at attractive rates, so it is worth checking if your bank offers these deals.
What are the advantages of PCP?
- The monthly cost is usually lower than for Hire Purchase (HP) finance
- You have the option to buy the car at the end of the finance agreement, which isn't the case with Personal Contract Hire (PCH) finance
- It is a good option if you like to change your car frequently as you can simply move from one PCP agreement to another
What are the disadvantages of PCP?
- The large balloon payment is unaffordable for many people
- You are restricted by a mileage limit. If you exceed this limit, you could be charged a penalty of around 10p for each extra mile. You will also have to pay for any damage on the car, over and above what can reasonably be expected for wear and tear
- You won't have ownership of the car until you have made the balloon payment, which means you won't be able to sell it or modify it in any way
- As you don't own the car, it could be seized by the finance company if you don't keep up the repayments
What are the alternatives to PCP?
For a full breakdown of the different car finance options available, read our article: "Buying a car: what are the best finance options?"
For an in-depth explanation of HP, go to "What is Hire Purchase – should I use it to finance my next car?"
For details of PCH, read "Is Personal Contract Hire the best car finance choice for you?"
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