PCP Finance Explained: What is PCP Finance and How Does It Work?

Chloe Murphy 6 minutes Published: 14/06/2021

Nowadays, the vast majority of new cars are purchased using some form of car finance deal. It typically offers a more affordable way to get your hands on a car, with spaced out payments rather than saying goodbye to a huge lump sum. 

Personal contract purchase, or PCP, is one of the most popular types of finance available. It offers fairly affordable fixed monthly payments, and you have the option to actually own your car at the end of the contract.

If you’re trying to work out the best way to finance a car, you’ve come to the right place. In this article we’ll go over what PCP car finance actually is, how it works, and give you a breakdown of pros and cons to help you decide whether it’s right for you.

What is PCP?

PCP is amongst the cheapest and most popular ways to get a car, as you aren’t actually paying towards the full cost of the car. With PCP you only pay the guaranteed minimum future value (GMFV), which is the cost of the car’s depreciation over the term of your contract, usually from 3-5 years. You’ll only pay more if you opt for the final balloon payment to purchase the car.

This means that the total cost of monthly repayments covers the difference in cost between the initial value of the car, and the estimated value when you hand it back. This cost is influenced by the price of the car you choose, the length of your contract, and the mileage you agree with the lender. 

Most dealerships will offer mileages of up to 30,000 per year, but the higher the mileage, the greater the monthly cost. Running more miles increases the rate of  depreciation, and in turn, the price you pay. 

This is where you need to be practical. The cheaper payments of a low mileage contract might seem like a steal, but if it’s far less than the miles you’re actually going to do, you’ll probably end up paying for it in excess mileage charges.

In addition to this, as you’re not yet the owner of the car, it has to remain in fairly good condition. If you’re on the fence from the get go about whether you’ll keep the car at the end of the contract, bear in mind that any damage or excessive wear could result in costly fines.

How does PCP work?

Taking out a PCP deal is relatively simple, and in many cases doesn’t even require an initial deposit. All you have to do is:

  1. Choose your car make and model
  2. Decide on a contract length
  3. Agree a mileage allowance

Once you’ve passed credit checks, provided the necessary documents, and set up your payments, buckle up and enjoy your new car. When it gets to the end of the agreement,  you’ve got a few options to choose from:

  1. You can return the car when you’ve got no more repayments, as long as you’ve stayed within your mileage limit and kept the car in good condition.
  2. Hand over a final payment in order to keep the car.
  3. Trade in your car for a part exchange. If the value of the vehicle is higher than the balloon payment at the end of the term, you can use this difference towards a deposit on a new PCP deal.

Pros and cons of PCP

If you enjoy the thrill of a new car and the latest tech every couple of years, PCP finance deals are likely a good fit for you. If you’re certain that you’ll want to keep it after the contract term, you could be better off exploring car hire purchase. You can compare the two in our handy PCP vs HP post.

There’s a lot of advantages to PCP, but as with anything, some downsides depending on your circumstances. We’ve listed the top pros and cons to give you an overview.

Pros of PCP

  • Low monthly payments - Your monthly instalments are often lower than HP and there’s usually no upfront cost.
  • Flexibility - You don’t have to stress about finding a new car at the end of the deal, as you’ve got the option to buy. If you’re happy to move on, just return your car.
  • Regular upgrades - PCP deals are a more affordable way to get a fancy upgrade that you maybe couldn’t afford to buy outright.
  • Used car purchases - If new cars are still out of reach financially, you can get even lower monthly payments with PCP finance on a used car.

Cons of PCP

  • Annual mileage cap - When you take out your PCP deal, there is almost always an agreed mileage limit. If you go over this and decide to hand the car back, you'll be charged extra as it negatively affects the car’s value.
  • Damage fees - Just like with leasing, your finance company will assess the car for any damage if you return it. 
  • You don’t own the car - The car still belongs to the finance company or lender unless you decide to make the balloon payment at the end of a PCP contract.
  • Higher interest - Interest rates are typically higher on PCP than on HP.

Where can you get a PCP deal?

If you’ve decided a PCP agreement is for you, there are a couple of options to get your car. The most popular is to finance through the car dealership or manufacturer that’s selling the car you want, and some will even offer deposit contributions as an incentive. But there are also a number of online car finance providers. 

Even if you prefer to browse in person, it’s worthwhile checking these for any good deals. Just be careful to check when getting a quote whether they’re going to carry out a soft or hard check on your credit score, as the latter remains visible on your file whether you decide to take the deal or not. If you are going ahead, sites like ClearScore can help give you an idea of your eligibility. 

Alternatives to PCP

PCP is a great choice for many first time car owners, but if it doesn’t feel like the right fit, there’s still plenty of other car finance options available. You can get a personal contract hire (PCH) deal, hire purchase, lease purchase, or a personal loan.  

As the experts in Personal Contract Hire (just another word for leasing), we’ve covered pretty much everything on it. Check out our article explaining exactly how car leasing works, or how much it costs to lease a car. We’ve looked at PCP vs leasing in detail.

With car hire purchase, you pay a deposit to secure a loan against a car, then you make monthly payments to pay off this loan. At the end, you have a small purchase fee to fully own the car. Our PCP vs HP post will clear up the differences for you.

Lease purchase is closely related to these other options but functions most similar to ordinary leasing, with the exception that you can buy the car at the end.

Personal car loans work by borrowing from your bank and buying the car outright, with repayments then made directly to your bank. We've gone through how to get a car loan and pinned PCP or bank loan against each other too.

You can also buy in cash or on credit card if you have the funds to pay upfront. Check our post "Should I get a car on finance?" if you're not sure whether to spread the cost out or splash out.

We hope this has given you a lot of food for thought! While you’re on your car finance exploration journey, be sure to check out our other related articles like PCP vs buying outright.