What is PCP car finance?

Personal contract purchase (PCP) is a type of car finance where you take out a loan on most of the car value and repay it over a set term. When the agreement ends, you’ll need to repay a large final sum (called a balloon payment) to cover the remainder of the car value - if you want to keep the car.

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Woman signing car finance

How does PCP work? 

When buying a car, there are several options to consider and it’s important to know the ins-and-outs of different car finance types. A PCP agreement is normally split into three main components: 

  • A deposit – usually about 10% of the car price
  • Monthly repayments over a fixed period 
  • A final ‘balloon’ payment

It’s worth noting that you can get PCP deals that don’t require a deposit too. 

However, the more you pay on your deposit, the lower your monthly repayments will be. If you’re not able to repay the balloon payment at the end of your agreement there are several other options. You won’t technically own the car until you pay off the entire amount.  

PCP vs hire purchase 

PCP is a similar option to hire purchase finance, however, there are some key differences.  

PCP car finance 

  • You pay a deposit, monthly repayments and – if you choose - a final balloon payment. 
  • With a PCP purchase, you won’t own the car until you pay back the entire loan and choose to make the final payment.
  • A PCP agreement is more suitable for someone who may not want to keep the car – or who likes to change their car every few years.

Hire purchase 

  • You pay a deposit and then repay the loan each month.
  • When you take out a hire purchase, you borrow the whole value of the car, so you own the vehicle at the end with no balloon payment.
  • hire purchase is more suitable for someone who wants to own the car outright. 

Buying a car with a personal loan 

personal loan (also known as an unsecured loan) is another alternative to financing a purchase on a car. You borrow a certain amount and repay over a fixed period. This means repaying it over a time agreed with the lender. They will charge you interest on the amount you owe each month, but you’ll own the car from the beginning and the loan isn’t tied to the vehicle.  

What are the benefits of PCP? 

One benefit of PCP is the monthly repayments will be significantly lower compared to other types of finance options, such as a hire purchase or a personal loan.

This is because you are expected to pay off a larger amount at the end of the agreement.  

However, at the end of the agreement if you can’t afford to pay this back, you can simply hand back the car. There also other options if you can’t or don’t want to pay the final balloon payment. PCP gives flexibility if you’re unsure about keeping the vehicle – or you like to change your car regularly. 

What happens at the end of my PCP contract? 

At the end of a PCP contract, there are three main options: 

  1. Pay back the final ‘balloon’ payment. You should do this if you want to own the car outright.  
  2. Return the car. If you don’t want to pay the final payment, then you can simply hand back the keys. If the car is worth less than what you owe, the lender of the car will take the loss and you won’t have to pay the difference.  
  3. Take out a PCP agreement on another car. If the value of the car is more than the balloon payment you owe, then you can use the difference for a deposit on a new car. This is the most popular option for a PCP agreement.  

Is PCP right for me? 

PCP could be right for you if: 

  • You’re looking to pay a low amount each month 
  • You like to change your car every few years
  • You’re not necessarily looking to own the car
  • Your circumstances could potentially change. This could be if you think you might not need the car in the future.  
  • You don’t have to travel too far too often, as it’s likely there could be an annual mileage limit on your agreement.  

What can I expect to pay with PCP finance? 

This depends on four things: 

  1. The value of the vehicle
  2. How long you’re borrowing for 
  3. The interest rate you’re offered
  4. Your deposit size

Typically, you’ll pay a deposit of about 10% of the car’s cost. Then, your monthly payments based on the number of years you’ll be borrowing for.  

At the end, you’ll have to pay several thousands of pounds for the final payment if you want to own the car.  

For example, if the car costs £20,000, you would pay a £2,000 deposit. If you agree to repay this over four years, you could be potentially repaying around £252 per month on the car. At the end of these four years, you would have a final balloon payment of £8,000 to pay off.  

You can get PCP (and hire purchase) deals where you don’t need any deposit, but this depends on the lender or dealership. 

Can I end my PCP contract early? 

PCP contracts can be very difficult and expensive to get out of early. It is usually easier to end this if you’ve already paid back 50% of the loan. This includes the final balloon payment and any other fees or charges. For example, if the original cost is £20,000, you’ll need to have paid back at least £10,000 of this cost already. You’ll also need to make sure the car is in good condition with no damages.   

Are there any other charges I need to know about? 

If the car incurs any damage, you could potentially be fined but this would depend on the extent.  

If you go over your annual mileage limit you may also have to pay an extra charge. This is because more miles will decrease the value of the car. It could potentially cost around 10p for each mile you go over the limit.  

If you decide the buy the car at the end and pay the final ‘balloon payment’ you may have to pay an admin fee for the cost of transferring the legal rights of the car. This could potentially be between £100-£500.  

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*Representative example: Borrowing £6,500 over 5 years with a representative APR of 20.7%, an annual interest rate of 20.7% (Fixed) and a deposit of £0.00, the amount payable would be £168.48 per month, with a total cost of credit of £3,608.67 and a total amount payable of £10,108.67. Rates may differ as they are dependent on individual circumstances. Subject to status. We're a credit broker, not a lender.