What Is Personal Contract Purchase (PCP)?

Unless you’ve been living under an automotive rock for the past five years, you’ve probably heard of personal contract purchase (PCP) as dealers across the country are pushing it as a low-cost, no-fuss car financing option.

However, according to research from The Car Expert, 88% of men and 75% of women couldn’t actually explain what PCP was.

Well, I’m here to fix that.

Here’s a short guide to break down the basics of PCP and help you work out whether it's the right financing option for you.

How does PCP work?

PCP is the most popular type of vehicle finance in the UK, funding over 70% of all the new cars bought in the UK!

However, despite being the most popular option, most people can't explain how it works! If you're one of those people, here's a quick primer.

PCP works by breaking up the list price of a car across an initial deposit, monthly payments and an (optional) balloon payment.

At the end of your PCP deal —which usually lasts two, three or four years — you can choose to buy the car from the finance company by paying the balloon payment. Alternatively, you can decide not to pat the balloon payment and hand the car back to the dealer.

  • Deposit: Dealers will ask for about 10% of the car’s list price as a deposit.
  • Monthly Payments: The amount you pay each month is based on the depreciation of the car.
  • Balloon Payment: The balloon payment is what you have to pay at the end of the PCP period if you want to own the car.

What happens at the end of a PCP contract?

So, you’ve taken out a PCP deal and you’re nearing the end? What do you do now?

Well, when your PCP deal has come to a close, you've got three options.

  1. Get a new car. This is the most common option for people on PCP deals. At the end of your deal, you hand back your car and sign a new PCP deal for a brand new car. If your old car is worth more than the dealer thought it would be, you can often roll that equity into your new deal.
  2. Give the car back. This is the simplest option. You hand the keys back and walk away. (Well, as long as you don’t have any extra payments for damage, excess mileage or other penalties.)
  3. Buy the car. At the end of your deal, you can choose to buy the car from the finance company by paying the balloon payment.

Does PCP have extra charges?

If you stick to the rules in your PCP contract, you shouldn’t have any extra charges when you hand the car back.

However, it’s not uncommon for motorists to get stung by a couple of nasty extra charges.

Excess mileage

Before you sign your deal, you’ll have to estimate how far you'll drive each year. This estimate allows the dealer to calculate the value of the car after your deal finishes.

If you go over that mileage, you’ll have to pay to make up the loss in value. Typically dealers will charge 7-10p for every mile over your estimate.

Damage charges

Just like with a hire car, you're liable for any damage done to the vehicle. You’ll get away with normal wear and tear like scuff marks but any serious damage will need to be paid for.

Is PCP right for me?

If you’ve been into a car dealership recently, you’ll know how pushy dealers are being with PCP deals. Don't get caught up in the patter and let them force you into a decision that's not right for you.

If you want a new car with the option of buying it after the leasing term, PCP might be an option.

However, PCP isn’t right for everyone.

Just 20% of people on a PCP deal end up actually buying the car. If you think you’re in the 80% who won’t buy it at the end of the deal, it's usually cheaper to go with a straightforward Personal Contract Hire (usually just known as leasing) deal.

With leasing deals, you don’t have the option to buy the car at the end of the term but the repayments are usually lower than an equivalent PCP offer.

On the other hand, if you will definitely want to keep a car once the leasing period has elapsed, it’s quite a bit cheaper, in the long run, to go with hire purchase or a personal loan. Another benefit of these two options is not having to make a huge balloon payment in one go.

If you're still not decided whether PCP is for you, here's a super condensed list of pros and cons to help you make up your mind.

Benefits of PCP

  • You get a brand new car
  • The monthly payments are usually lower than personal loans and hire purchase
  • You don’t have to worry about the resale value of the car
  • Your options at the end are pretty flexible
  • You can often afford a nicer car than on other finance
  • Repairs and maintenance are rare because the cars are new
  • You have the option to buy the car

Drawbacks of PCP

  • You don’t own the car during your deal
  • Balloon payment is a large one-off charge
  • Extra payments can unexpectedly increase the final bill
  • You will have to pay for any damage
  • You will have to pay for excess mileage
  • Tends to cost more than PCH
  • You are locked into a contract for the full term