Personal Contract Purchase
What is PCP and how does PCP work?
Here’s what will happen when you finance a car through a PCP:
1. First you’ll need to pass a creditworthiness assessment.
Before you sign up for a PCP deal, you’ll need to go through a creditworthiness assessment which is made up of two factors. First is the affordability of the PCP payments across the whole term of the contract based on your finances – think of it as finding out how difficult it is for you to keep up your repayments. The second is credit risk, which is the chances of you not paying your PCP loan back to the loan company.
You can get an idea of your affordability by looking at whether there are future costs that might affect your ability to keep up your repayments in 4 years’ time. Use our Budget Planner to help, and take a look at our Making sure you can meet your car payments page.
2. Then you’ll need to pay a deposit, usually 10% of the value of the vehicle.
3. You’ll then be able to use the car, but remember you don’t own it yet. You’ll also need to make your payments for the duration of the contract.
Make sure you stay within your mileage restriction. There will be charges if you go over your limit. Be extra careful not to damage it too as you may be charged at the end of the contract. If you think you may go over the allowed mileage it may be worth considering getting a deal with more mileage.
4. When the contract is up, you’ll need to decide if you want to keep the car, return it, or use its value to act as a deposit on a new PCP.
If you want to keep the car, you’ll need to make a final payment, often called a balloon payment. This is based on what the dealer thinks the car is worth now - its Guaranteed Minimum Future Value (GMFV). This can range from a few hundred to a few thousand pounds, but will be much more than the normal monthly payments. If you haven’t got this money saved, you may have to take out another loan to pay it off.
5. If you’re not going to keep the car, you can hand it back without any further payments.
6. Alternatively, you can use the car’s value after paying off the GVF as a deposit on a new PCP.
You may need to stick with the same dealer if you want to do this.
Is PCP right for me?
If you want to change your car in a few years’ time, PCP could be a cost-effective way to finance it. If you are going to keep it for longer than that, you may be better off with hire purchase or a personal car loan.
These will cost more each month as you're borrowing and paying off more, but you will own the car without taking a big balloon-payment sized hit at the end. If you do opt to keep the car, PCP is generally more expensive than hire purchase.
Only 20% of people with a PCP deal actually buy the car. If you think you're in the 80% who won't buy it, it's worth looking at whether leasing may be a better option. You don't get the chance to own the car, but you also pay less each month. Essentially, you’re just renting the car for an agreed period, so it’s worth contrasting this cost against PCP.
Here are the pros and cons of PCP:
You get behind the wheel of a new car for lower monthly repayments than a personal loan or hire purchase.
You don’t need to worry about the future trade-in or resale value of the car, as the lender guarantees your car will be worth a minimum sum at the end of the deal.
It's flexible. You've several options at the end of it - you can even buy the car if you like.
Dealers will often throw in service and maintenance packages, warranties and insurance so you can get your total cost of motoring down to one payment each month (though check these are free, or if not, represent good value).
A PCP may let you buy a more expensive car than you might otherwise be able to afford but with monthly payments to suit your budget.
As PCP deals are usually only offered on new or nearly-new cars, you don’t have to worry about an old banger that’s likely to need a lot of repair.
You won’t own the car during the contract period (though this is the same for almost all dealer finance agreements) – and will only own it at the end if you pay the balloon payment.
If the predicted minimum future value is set very close to the actual value of the car you will have little equity to roll onto another deal. If there isn’t any, you will have to get your hands on a deposit for a replacement car elsewhere.
Extra charges of 7-10p per mile if you go over the agreed set mileage.
The future value is based on keeping the car in good condition. You’ll be charged extra to put right anything that’s not down to normal wear and tear.
Who offers PCP?
The most common is to get the finance through the dealership you're buying from. However, before you start, there are some online brokers that have decent offers when you're looking for a PCP deal - and it's worth looking at these first so if you do go to a dealership, you know what's the cheapest elsewhere and can compare.
Beware of over-charging! Always compare finance deals, look at overall costs and ask about how much commission the dealer or broker is going to get. The Financial Conduct Authority has warned of lender incentives leading to overcharging on interest by motor dealers and credit brokers.
PCP deals can be found from a handful of online brokers. These are handy to get an idea of the prices and repayments you might be looking at on your ideal car. Brokers offer a wide range of deals, including those for buyers with a tarnished credit history. They simply supply the finance through a variety of lenders.
If you are asking for a quote from any of these brokers, check whether they will do a hard or soft search of your credit file to give you a quote. If it's a hard search, be wary, as this is fully visible on your credit file to other lenders as an application, even if you then don't take out the loan. Too many of these in a short space of time is a red flag, so think carefully.
Some of these brokers will also be able to source vehicles for you, as well as finance. But you can still get your car from any dealer in the UK, and just use the broker for the loan. Funds will be sent to the dealer after the finance agreement is signed.
Often known as forecourt finance, or just car finance, it's offered by almost every dealership in the UK - and PCP is one of the options they offer. Dealerships come in three main types: franchised (tied to one or more manufacturers, eg, BMW garages), independent (not tied) and car supermarkets.
Getting a PCP through the manufacturer's finance arm
In a franchised dealership, finance deals are usually arranged through the car finance arm of a manufacturer – so Ford Credit, for example, or Volvo Financial Services. It's definitely worth looking at what these dealerships can offer you on a finance deal, especially if you're buying a new car.
If this is the case, it's not uncommon for the manufacturer to give £500-£2,000 to you as a deposit contribution, and also offer 0% finance. If you don't qualify for 0% finance, you'll usually get an advertised APR offer of between 4% to 7%; though this is representative, so if you have a poorer credit history, you could be offered a much higher rate.
It's worth saying that if you know you want to own the car at the end of the deal, PCP will give you low monthly payments, but, once you include the balloon payment you need to pay at the end, PCP is almost always more expensive than a personal car loan or hire purchase.
Getting a PCP through an independent dealership or car supermarket
Many independent dealerships and car supermarkets get their finance from big banks' consumer arms, allowing them to be able to offer the same range of deals as the manufacturer-tied dealers. Blackhorse (part of Lloyds) and Santander Consumer Finance, for example, supply finance deals to non-franchised dealerships.
These finance providers aren't tied to manufacturers, and therefore can't offer the heavily subsidised 0% finance or deposit contributions that the car companies' finance arms can on their PCP deals. If you go to one of these dealerships, expect a representative APR of somewhere between 5% and 10% - or more if you've a bad credit record.
It’s a competitive market out there – check what’s available online and from dealers, and ask yourself what you can really afford. It’s vital you can afford the repayments before you commit. With all these types of finance, if your application is accepted, finance is sent directly to the dealer.