What is a Personal Contract Purchase?

How does a PCP plan work? (step-by-step)

• Find the right PCP deal for you - Using an online car finance comparison site, search for PCP options in line with your requirements. Compare several deals to decide which one is best for your needs and financial circumstances.

• Consider your finances - When choosing a PCP plan, consider your present finances and any future costs that could impact your ability to keep up with repayments over the next few years.

• Pass a creditworthiness assessment - Before accepting you for a PCP plan, your chosen lender will run a creditworthiness check to ensure your eligibility. This will be based on the following two factors: your finances (i.e. how difficult it is for you to keep up repayments) and ‘credit risk’ (the risk that you won’t pay the loan back to the lender).

• Pay your initial deposit - This usually accounts for around 10% of the vehicle’s total value.

• Enjoy the car – and keep up with your payments - Once you’ve paid the deposit, you’re free to use the car, although you won’t own it yet. Make sure you keep up with the monthly payments.

• Keep the lender in the loop - If you are struggling to make the regular payments, contact the lender as soon as possible. They may be able to extend the term of the loan to reduce your monthly payments. Similarly, if it looks like you’re going to exceed your mileage limit, let the lender know; they may be able to increase your mileage limit. (This will usually increase your monthly payments.)

• Decide whether to buy the car - When the contract term comes to an end, you’ll have the option to buy the car by making the ‘balloon payment’. This is based on the car’s Guaranteed Minimum Future Value (GMFV), a figure set by the lender at the start of the contract, which represents what they expect the car to be worth when the term ends. The GMFV is fixed throughout the contract.

• Put the value towards a new car - If your car is worth more than the balloon payment, you’ll be in positive equity, leaving you with cash to put towards the deposit for your next car.

• Hand the car back - If you’d prefer not to make the balloon payment when the contract ends, you can simply hand the car back to the lender at no extra cost.

Curious about whether a PCP plan is right for you? Work out your monthly costs with our free car finance calculator.

Advantages of Personal Contract Purchase

• Lower monthly payments - If you want to finance a car with a view to buying it whilst keeping your monthly payments low, a PCP deal could be a good option. Monthly payments for a PCP deal are usually lower than for a HP plan.

• Suitable for buyers with a poor credit rating - If you have a poor credit rating, you may still be able to secure a PCP deal.

• Flexible terms - Most PCP lenders can tailor your contract to suit your preferences and financial circumstances.

• Choose a deal with a new or used car - Unlike Personal Car Hire (PCH) deals which are predominantly focused on new models, you can get PCP finance for a wide variety of used models. For the best chance of getting a PCP agreement, choose a vehicle under 4 years old with a low mileage.

• Servicing and warranty included - Many PCP deals include servicing and a manufacturer warranty, which can help to take some of the hassle out of motoring.

• Reduced risk with a GMFV - When you sign up for a PCP deal, the dealer will set a GMFV for the car. So, if the car depreciates at a higher rate than expected, you won’t lose out. What’s more, if the car happens to be worth more than the GMFV at the end of the term, you’ll be in positive equity, with extra cash to put towards your next motor!

• No obligation to purchase the car - If you reach the end of the contract and decide you don’t want to buy the car, you can simply return it to the dealer. If you decide not to buy the vehicle, you won’t have to worry about depreciation or selling your car.

• Boost your credit score - Utilising a form of car finance such as a PCP plan can help you to improve your credit score over time.

Disadvantages of Personal Contract Purchase

• Expensive balloon payment - The balloon payment is often a large sum of money. Some lenders will attempt to entice you with a 0% APR deal whilst increasing the balloon payment to offset the cost to them.

• Large deposit - The initial deposit for a PCP contract is typically higher than for a HP agreement.

• Additional charge for damage - If you choose to hand the car back at the end of the contract, the lender will thoroughly inspect the vehicle. If the damage is deemed to exceed normal wear and tear, you’ll be charged for the necessary repairs.

• Higher interest if your credit score is low - Whilst it is possible to finance a car through a PCP plan with poor credit, you can expect to pay a higher rate of interest, which will increase your monthly payments.

• Penalties for exceeding your mileage allowance - PCP contracts usually include a mileage limit, stating the maximum number of miles you can drive. If you exceed this mileage, you will be subject to a penalty, which varies between providers (but is often between 4-10p per excess mile). The excess mileage charge will be applied at the end of the contract, so if you travel 3,000 miles in one year with an annual mileage limit of 5,000, the extra miles will effectively be added to your limit for the next year.

• Expensive cancellation - Before you can cancel your contract, you’ll need to pay 50% of the total finance contract, tax – and the balloon payment. This can make cancelling your contract early rather costly. What’s more, if you decide to cancel after paying over 50% of the total finance, you won’t be able to recoup any of the extra money.

• You won’t own the car outright - Unlike with financing a car through a personal loan, if you use a PCP plan, you won’t own the vehicle straight away. You’ll only be able to purchase the car at the end of the contract, should you decide to make the final balloon payment. Up until this point, the car will remain the property of the finance company.

Example of a PCP contract

• Car price - £15,000

• Contract duration - 36 months

• Deposit - £1,000

• Monthly payments - 36 x £271

• Representative APR - 7.9%

• Option to purchase fee - £10

• GMFV/balloon payment - £6,750.00

• Total cost of credit - £2,516.51

• Total repayment - £9766.51

• Total payable to purchase car - £19,043.02

Source: webuyanycar car finance calculator

What factors will determine the cost of my PCP plan?

The cost of your PCP plan will depend on the following factors:

• Your deposit amount: The larger your initial deposit, the less you’ll have to borrow (and pay interest on).3

• The term of the loan: Whilst choosing a longer-term PCP plan will lower your monthly payments, you’ll pay more interest overall.

• The interest rate: The lower the interest rate, the less interest you’ll have to pay throughout the term of the loan. You may be able to access more favourable interest rates by improving your credit score.

• Whether you keep the car: If you decide to keep the car at the end of the contract, you’ll have to make a balloon payment. You’ll pay less overall if you simply hand the car back, but you won’t have anything to show for your investment.

• Additional fees: If you exceed your mileage limit over the course of your contract, you will incur an extra charge. The lender will also inspect the vehicle at the end of the contract and may impose a repair charge for any damage deemed to exceed normal wear and tear. If you want to keep the car at the end of the agreement, you may also have to pay a nominal ‘option to purchase’ fee.

PCP financing tips

• Balloon payments are typically thousands of pounds. If you’re keen on owning the car, make sure you set enough money aside each month to save for this payment.

• If it looks like you will exceed your mileage limit, it’s a good idea to liaise with the lender. They may be able to increase your mileage allowance so that you’ll avoid paying an excess mileage fee. Just bear in mind that this will probably increase your monthly payments.

• Make sure you stay on top of the car’s servicing and maintenance to help you avoid being hit with a repair bill at the end of the contract.

• If you’re ambivalent over whether you want to purchase the car, consider whether an PCH plan would make more financial sense for you. With a PCH plan, the option to purchase the car is off the table, but the monthly payments are typically lower.

Alternatives to PCP

Is PCP right for me?

• A PCP plan can offer an affordable way to get behind the wheel of a new car with a view to eventually buying it.

• You can also part exchange the car for a new one at the end of your agreement. So, if you like switching to one of the latest models every few years, a PCP plan may be an attractive option.

• If you have a poor credit score, you’ll have a better chance of getting accepted for a PCP plan than other car finance options, but your monthly payments are likely to be high.

• There is no obligation to buy the car at the end of the contract. However, if you have no intention of buying a car, simply leasing it through a PCH plan will probably work out cheaper.

• If your annual mileage is particularly high, a PCP plan may not be suitable due to mileage limitations.

• With a PCP plan, you won’t own the car until you’ve made the final balloon payment.

• This means you cannot make any irreversible modifications such as installing a new engine. If the lender discovers you have breached this rule, they may terminate your agreement and present you with an expensive bill!

• If you want to pay for a car over a series of instalments without a balloon payment, you could consider a HP plan.

• If you think your financial circumstances will change or you will be unable to keep up with the payments, you should explore alternative avenues to fund your next car purchase.

Can you get PCP finance with bad credit?

Yes, lenders with poor credit scores are often accepted for PCP plans. However, if you do have bad credit, you may be charged a higher rate of interest.

What if you can’t keep up with your PCP payments?

If you fall behind with payments for a car on a PCP plan, the lender could repossess the vehicle. Therefore, if you are struggling to make your regular payments, speak to the lender; they may offer to extend the term of the plan to reduce your monthly payments.

What is the difference between a HP and PCP plan?

HP and PCP plans both require an initial deposit, followed by a series of monthly instalments. However, the key difference between a HP and PCP is that the monthly instalments for a PCP are effectively paying off the car’s depreciation over the term, as opposed to its total value.