The Ultimate Guide to PCP Car Finance
The majority of new (and nearly new) cars sold each year in the UK are being bought using financing options, with PCP car finance being by far the most popular option in 2019.
Around 80% of new cars you see on the road every day have been bought via a PCP deal, along with a growing amount of used vehicles too. PCP’s popularity has exploded in recent years.
But it’s not without its issues. PCP can be tricky to understand, so our ultimate guide to PCP car finance is here to cut through the jargon and can help you find the best option.
For some car buyers, it can allow them to get a better vehicle for a lower monthly cost. But there are also potentially big costs and penalties involved if you want to end it, which some customers might not realise.
If you’re looking to buy a new or used car, it’s worth spending the time to fully understand PCP car finance before you sign up to an agreement for the next three or five years.
Below we look at all the things to consider…
PCP car finance explained:
- What is PCP Finance?
- Should you buy a car on PCP?
- How does PCP work?
- What should you watch out for?
- How long a term should you choose?
- What other car finance options are there?
- Where can I find a good PCP deal?
- Should you buy direct from a manufacturer PCP offer?
- Is it worth buying a used car via PCP?
What Is PCP Car Finance?
PCP finance is the abbreviation for a Personal Contract Purchase. It’s essentially a combination of leaving a vehicle for personal use, and the more traditional hire purchase method of buying something via regular instalments.
Which is why every new car advert now promotes prices ‘from an amount per month’, rather than the total new purchase price.
The PCP approach to leasing originally started in the late 2000s, following changes to the way that tax was applied to company cars.
But the popularity of it soon meant it came to smaller businesses and the mass personal market. That has led to a boom in new car purchases, fuelled by the new payment option.
And lots of people have benefitted from access to newer vehicles, including both consumers and manufacturers.
Car companies and dealers were facing a slowdown in sales due to the aftermath of the global recession, but PCP allows people to invest more frequently in higher priced car models.
That led to big increases in sales for premium brands. And for specific types of car, for example, Sport Utility Vehicles (SUVs).
The big difference with a PCP Car Finance Deal is that you’re not paying equal instalments to own your car at the end of the agreement.
Instead you pay an initial deposit and much lower monthly payments. But at the end of the agreement, you’ll then have the option of paying a final ‘balloon’ payment to get total ownership of your car.
Or you can return it to the dealer and drive away in something new. Although you may be tied in to cars from the same manufacturer.
If you decide to swap your car at the end of your PCP car finance, then the benefit will depend on the initial Guaranteed Minimum Future Value (GMFV) which is set out when you enter into the deal.
It’s the lowest value your car will be worth at the end of the agreement. So if your vehicle is actually worth more, then you can use the equity towards your next set of wheels. If it’s worth less, then you can just hand it back.
In the UK, around 80% of PCP customers will end up returning their car and signing up for a new deal, with just 20% settling the final amount to own their current vehicle outright.
And if you already own a car, then you need to decide whether to sell your car online. Or if the dealer will part exchange it towards your PCP deal. Check your car valuation to decide what makes the most financial sense.
Should You Buy a Car On PCP?
The decision to use PCP Car Finance depends on your personal situation. If you’re keen to have a new car on your driveway every few years, then it enables you to get more for your money. And if you’re happy to stick with the same manufacturer, it’s a relatively easy way to have access to a modern car for a lot less cash.
But you do need to ensure you meet the terms and conditions. These generally include a mileage limit, sticking to the manufacturer service plan, and avoiding or repairing any damage.
Otherwise you may find yourself penalised by an additional cash payment when it’s time to return your car.
If you prefer to own your car at the end of any finance agreement, then PCP probably isn’t the best deal for you. Not only do you face the large final payment in a few years time, when your circumstances may have changed.
But you also have to hope that used car values have held steady or risen in the meantime. Otherwise you’re taking on the risk that the Guaranteed Minimum Future Value (GMFV) is still accurate when it comes time for you to settle the balance on your car
For more on how car values can change over time, have a look at our ultimate guide to car depreciation.
How Does PCP Work?
A typical PCP car finance deal works in roughly the same way as a traditional hire purchase or vehicle lease. With the additional option of the final balloon payment if you decide you want to keep and own your car.
There are three major elements of a typical PCP agreement:
The Deposit: You’ll need to pay a certain amount up front to start the PCP deal. This is usually around 10% of the total new value of the car. Some manufacturers do offer a ‘deposit contribution’ towards the cost if you use their specific finance package.
That amount can be between £500-£2,000 or more. So you’ll still need some money saved before you start shopping around for a new car.
The Loan Amount: This is how much you borrow and then repay each month during the term of the agreement. The amount is based on the depreciation expected, along with Annual Percentage Rate (APR) interest on the loan.
Typical APR rates vary from around 4-7%, but can be as high as 20%, particularly on used cars. If you’re offered a low or 0% deal, then make sure you check whether that money is being made back by the dealer in a higher initial or final payment.
The Final Payment: The balloon, or GMFV, is the payment made at the end of the agreement if you decide to keep and own the car when your PCP car finance concludes.
It’s the agreed expected value of your vehicle which should be made clear at the start of your deal. And is also where you may get some equity to invest, if you decide to switch to a new PCP agreement. It’s also where you might make a loss if your car has lost more value than expected.
The additional important elements to consider before taking out a deal are the terms and conditions regarding mileage limits, servicing and accidents or damage.
There may also be penalties if you try to end the PCP agreement prematurely.
As a guide, you could be charged between 7-10p for each mile over any agreed limit. So every 1,000 extra miles could cost you an additional £100. It’s also worth checking whether details like car tax are covered for the first year or longer, so you don’t get caught out.
How A Typical PCP Contract Works
So as an example of a £20,000 PCP car finance deal, on a car estimated to be worth £10,000 after 3 years:
Your Deposit: Paying 10% of the value will mean a £2,000 deposit before any manufacturer contribution.
The Loan Amount: You’ll then borrow and repay £8,000 plus interest. That’s the depreciation minus your deposit. At 5% APR, over 36 months, you’ll pay back an additional £631 of interest at £239.77 per month.
The Final payment: £10,000 plus interest.
If you’re swapping to a new PCP car finance deal, then you’ll have paid a total of £10,631 to use a £20,000 car for three years.
Whereas making the final payment will also include interest, raising the total amount paid. You’ll also often have to pay an administration ‘option to purchase fee’ around £150 to cover transferring ownership.
APR Rates? What is a Good Deal?
Typical APR rates will vary with the UK economy and financial market. And also on your personal money history and credit rating. The difference in rates could see you paying hundreds more every month, so it’s worth doing your research.
Looking around for 0% deals, larger deposits and manufacturer contributions, and potentially saving yourself thousands of pounds.
A typical low APR rate would be around 3.2%. Meaning that a £10,000 amount would total £10,493.64 in repayments over 36 months.
A moderate APR might be around 12.1% which would take the total cost of a £10,000 deal to £11,867.40.
As an example of how much repayments can vary, sign up for a high APR rate of 38.49%, and you repay a total of £15,881.76.
What Should You Watch Out For?
There are several key areas to look at when you’re shopping for a PCP car finance deal.
- The deposit amount: Can you get a manufacturer contribution, or save with a larger deposit amount?
- The APR Rate: How much interest will you pay on both the loan amount and final repayments? Are you saving by getting a better APR, or do you end up spending in other areas?
- The final GMFV amount: Is the final value of your car realistic when it comes time to buy or trade in? Could used values suddenly drop, leaving you out of pocket if you decide to buy the car?
- The conditions of the agreement: Are you likely to exceed the milage limits? And avoid making any modifications or failing to repair damage which could cost you when the agreement is coming to an end?
- Insurance: Generally car insurance will pay out on the agreed value of the car at the time it is stolen or written off, which can leave you out of pocket on a PCP deal. Gap insurance will increase the amount to the original sale price or the amount outstanding on finance.
How Long a Term Should You Choose?
The best length of your PCP car finance deal will depend on your circumstances. Obviously a longer period will lower your repayments, and typically most contracts will run from 36-60 months.
The three-year period also means you don’t have to worry about MOTs. And it avoids a lot of the wear and tear which can affect older cars.
But this does mean more things can change during the agreement, including used car values. And you’ll often pay an additional cost if you decide you want to shorten your PCP deal earlier.
If you’re buying a used car, then a longer PCP period will mean a much older vehicle by the time it’s finished. Which can mean values are much harder to predict.
What Other Car Finance Options Are There?
PCP isn’t the only option if you’re buying a new or used car. The traditional options of hire purchase, personal car loans and leasing still exist.
They may be cheaper whether or not you plan to own your car at the end of any agreement.
Personal car loans are available from a variety of places, including most banks and building societies. The benefits include the simplicity, the fact you’ll own the car outright straight away, and you can generally get cheaper interest rates over 1-7 years.
The downsides are that you might not be eligible without a good credit score, the monthly payments will be higher, and you’ll lose out on depreciation.
Hire purchase has declined in popularity due to PCP. But it still accounts for around 20% of new car buyers, and a lot more in the used market.
The benefit is you’ll own the car outright at the end of your agreement, with no large final payment involved (just a transfer fee). But as the name indicates, until that last money is transferred, you’re legally hiring your car.
And it can be repossessed if you can’t make your monthly payments. The monthly costs will also be higher than with a loan or PCP deal.
Leasing is the other option to get behind the wheel of a new car. But this is a longterm car rental mainly aimed at businesses, so you’ll take ownership.
Mileage and damage costs will apply, and can be higher than for a PCP deal. And you may also need to take out gap insurance to avoid paying out if your insurer values the car for less than the lease company in the event of theft or an accident.
As a private owner, it doesn’t often make sense for smaller, lower value cars. The total cost is closer to buying the vehicle. But it can be a reasonable option if you really want to drive a more expensive premium model which will hold its’ value.
The monthly costs are partly based on depreciation which means it can be cheap access to a high-end car.
Where Can I Find a Good PCP Deal?
There are a range of brokers offering independent PCP car finance deals, alongside dealers and manufacturers. So it’s worth looking around, but make sure you know whether a hard or soft credit file search is required by each provider.
Avoid too many hard credit searches as this is visible on your financial history. And having lots in a short space of time is a red flag to potential lenders.
Independent car dealers will also offer a range of finance options supplied by big banks such as Blackhorse (part of Lloyds) and Santander. Which give them a similar range of offers as main dealerships, but without some of the benefits manufacturers can offer.
UK PCP brokers and car finance comparison sites…
There are a number of services which not only compare potential finance packages, but may also be able to source a car for you if you prefer.
Here are some of the UK’s most popular comparison sites for finance deals and purchases:
- Car Money
- Find And Fund My Car
- Halifax Bank (requires a Halifax current account for 3 months or more)
Should You Buy Direct From a Manufacturer PCP Offer?
This really depends on deals available. Major car manufacturers and their network of dealers will be able to offer PCP contracts with subsidised 0% finance or deposit contributions. Or they may offer additional incentives and upgrades including higher levels of specification and trim.
If you investigate, you may be able to save money or get an even more desirable car for the same price.
The downside is that you’ll potentially find yourself tied in to that manufacturer if you want to hand your car back without a final payment and get a good PCP deal on a new model.
So if you plan on sticking with Audi, BMW, VW or Volvo, it can be a great option. But if you have a bad experience or just fancy a change, you might lose out more at the end of your agreement.
Is it Worth Buying a Used Car on PCP?
Initially PCP car finance deals were mainly aimed at premium new market. But over time they’ve increasingly spread to used vehicles.
It’s down to a combination of slowing new car sales, high residual used car values, and low interest rates. As a result, it can be cheaper to buy a newer secondhand car on PCP than an older model in cash.
One major advantage buying a used car with a PCP deal is that the monthly payments tend to be low. That’s because the largest drop in depreciation has already taken place. So a used car will hold more of the value from when you take out your agreement.
But there are disadvantages. You’ll struggle to find older vehicles available as car values become less predictable after around 8 years or so. Factors like wear and tear become more important.
And you’ll also have the increased costs of maintenance, whilst still having to stick to the terms of your agreement. Plus, if you buy a 6-year-old car on a 4 year PCP deal, you’ll be agreeing to the predicated value of a decade-old vehicle by the time it ends.