PCP car finance – the ultimate guide
The popularity of PCP has exploded in recent years. In fact around 80% of new and used cars use a PCP. But do you know how it works?
For some car buyers, PCP means the ability to buy a better vehicle for a lower monthly cost. But PCP can be tricky, and buyers may not be aware that there are potential big costs and penalties involved if they want to end it.
So before you sign up for an agreement for the next three or five years, spend the time to fully understand PCP car finance.Our ultimate guide will help cut through the jargon to help you find the option that gives you more.
PCP car finance explained:
- What is PCP Finance?
- Should you buy a car on PCP?
- Best PCP finance deals
- How does PCP work?
- What should you watch out for?
- How long a term should you choose?
- What other car finance options are there?
- 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 took off in the late 2000s. Following changes to the way that tax was applied to company cars, it became a popular option for smaller businesses and the mass personal market.
Essentially, PCP combines leasing a vehicle for personal use with the more traditional hire-purchase method of buying via regular instalments.
Rather than paying equal instalments to buy your car over time, with PCP you pay an initial deposit and lower monthly payments until the end of the contract. At that point, you have the option of paying a final ‘balloon’ payment to buy your car outright. Or you can hand it back without further commitment, sell it, or even trade it in.
If you decide to swap your car at the end of your PCP car finance, then the amount applied to your trade will depend on the initial Guaranteed Minimum Future Value (GMFV) set out when you enter into the deal.
The GMVF is the lowest amount your car will be worth at the end of the agreement. It’s an estimate but if your vehicle is actually worth more, then you can use the equity towards your next set of wheels. And if it’s worth less, you simply hand the car back.
In the UK, around 80% of PCP customers return their car at the end of their contract and sign up for a new deal. The other 20% settle the final amount to buy their current vehicle outright.
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, it enables you to get more for your money in terms of car quality.
It’s a reason budget-stretching premium brands and SUVs became popular despite the global recession.
But whichever car, you’ll need to meet the terms and conditions of the PCP. These generally include a mileage limit, sticking to the manufacturer’s service plan, and repairing any damage.
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. 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. The GMFV set at the start of your contract can require a large final payment at the end of your contract. By this time, your circumstances may have changed or the value of your car fluctuated more than predicted.
To avoid these risks, you can sell your car on Motorway and our network of 5,000 trusted dealers will take care of any outstanding finance. Just one more way we help you put more money in your pocket.
How Does PCP Work?
A typical PCP car finance deal is similar to a traditional hire purchase or vehicle lease, just 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: The amount you pay upfront to start your PCP deal.
💷 The loan amount: The amount you borrow and then repay monthly
during the agreement
💷 The final payment: The amount you pay at the end of your PCP to own your car outright
An example PCP contract
Let’s look at what this would mean for a £20,000 PCP car finance deal, on a car estimated to be worth £10,000 after 5 years:
💷 Your deposit: You pay a 10% deposit equal to £2,000 before any manufacturer contribution.
💷 The loan amount: You borrow and will repay £8,000 plus interest. That’s the depreciation minus your deposit.
At 5% APR, over 60 months, you’ll pay back an additional £1,033.79 of interest at £150.56 per month. A total of £11,033.79.
💷 The final payment: Your GMFV is £10,000 plus interest. You’ll also often have to pay an ‘option to purchase fee’ of around £150 to cover transferring ownership.
| A note on APR rates. What is a good deal?Typical APR rates are influenced by the UK’s economy and financial markets, and the rate you’re offered reflects your credit rating. Looking around for 0% deals, larger deposits, and manufacturer contributions can potentially save you thousands of pounds. A typical low APR rate would be around 5.5%. This means that a £10,000 amount would total £11,4238.63 in repayments over 60 months. A moderate APR might be around 14.9% which would take the total cost of a £10,000 deal to £13,951.59. If you sign up for a high APR rate, for example, 20.9%, you’d repay a total of £15,607.36 This shows how key it is to do your research when shopping for PCPs. |
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?
Some manufacturers offer a ‘deposit contribution’ towards the cost if you use their specific finance package.That amount can be between £500-£2,000 or more.
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?
Typical Annual Percentage Rate (APR) rates vary from around 5-14% but can be as high as 21%, 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 deposit or final payment.
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
If you’re swapping to a new PCP car finance deal, this is where you may get some equity to invest when you switch. It’s also where you might make a loss if your car has lost more value than expected.
If you choose to make the final payment, it will also include interest and raise the total amount paid. You’ll also often have to pay an administration ‘option to purchase fee’ of around £150 to cover transferring ownership. And there may also be penalties if you try to end the PCP agreement prematurely.
The conditions of the agreement: Are you likely to exceed the mileage 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. Most contracts run between 36-60 months. Generally, the longer the period the lower your monthly repayments. But don’t forget you’ll pay an additional cost if you decide to end your PCP deal early.
The three-year period exempts you from having to book MOTs for that vehicle during the initial contract term and also puts you squarely within your warranty – making wear and tear repairs rarer and cheaper.
But this does mean more things can change during the agreement, including used car values. 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 make values 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 may be cheaper whether or not you plan to own your car at the end of any agreement.
Loans:
Personal car loans are available from a variety of places, including most banks and building societies.
The benefits include 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:
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). Instead the monthly costs will be higher to cover the purchase price.
But as the name indicates, until that last money is transferred, you’re legally hiring your car. So it can be repossessed if you can’t make your monthly payments.
Leasing:
Leasing is a long-term car rental mainly aimed at businesses.
Mileage and damage costs will apply and can be higher than for a PCP deal. 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. The monthly costs are partly based on depreciation which means it can be cheap access to a high-end car. But if you really want to drive a more expensive premium model that will hold its value, it can be a reasonable option.
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
- Carfinance247
- Zuto
- 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 the deals available. Major car manufacturers and their dealer network will be able to offer PCP contracts with subsidised 0% finance or deposit contributions.
They may also offer additional incentives and upgrades including higher levels of specification and trim.
However, this could potentially tie you into a specific 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 the premium new market, but over time they’ve grown to include used vehicles too.
A combination of slowing new car sales, high residual used car values, and low-interest rates means it can be cheaper to buy a newer secondhand car on PCP than an older model in cash.
One major advantage of 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. It’s harder to source older vehicles as car values become less predictable after 8 years. Wear and tear becomes a bigger factor, contributing to increased maintenance costs. All while having to stick to the terms of your agreement.
Should you sell your car?
Want to learn more about the best ways to sell your car? Check out more of our guides here, covering everything you need to know about different finance schemes, and what they mean for you as a car owner.
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- Ultimate guide to personal car leasing
- Ultimate guide to no deposit car leasing
- How to use a car buying site – what’s your car really worth?
- Car depreciation – ultimate guide
- How to value your car
- Should you buy or sell a diesel car?
- How to buy or sell a private number plate
- How to part exchange a car: complete guide
- Tips to sell a car online