A Personal Contract Purchase (PCP) deal is essentially a loan to help people own a car. However, unlike a general personal loan, buyers don’t have to pay off the entire value of the car and they don’t automatically own it at the end of the deal unless they choose to do so.

What is PCP (Personal Contract Purchase) finance?

As far as purchasing a car goes, a Personal Contract Purchase is among the more complex financial products available in the market. However, understanding it can be made simple by breaking it down into three main parts:

1.The Deposit (approximately  10% of the car’s price) – Dealers offering PCP finance usually ask for something like 10% of the car’s sticker price as a deposit. Many car manufacturers have finance arms that offer valuable ‘deposit contributions’ of £500-£2,000 or more while buying a new car when you take their cars. For example, VW Finance offers £1,000 as a deposit for buyers looking to buy new VW cars through PCP finance schemes. The larger the deposit, the less the buyers need to borrow. 

2. The Amount Borrowed – The amount borrowed is based on the finance company’s prediction about the car’s loss in value throughout the term of the deal (usually 24 or 36 months), excluding the deposit paid up front. Buyers pay this amount off during the deal, along with the interest. APRs are usually in the range of 4%-7%.

3. The Balloon Payment (a balancing payment made by buyers in case they want to own the car)- It’s  also referred to as the Guaranteed Minimum Future Value (GMFV). The balloon payment is the amount that the dealer expects the car to be worth once the PCP finance deal ends. The value is decided at the start of the deal. It’s not mandatory to pay this in all scenarios. However, if the buyer wants to keep the car at the end of the deal, the balloon payment needs to be made.

Pro tip: Be careful with 0% deals – they usually end up being be too good to be true. Take the 0% deals with a pinch of salt, as the dealers providing such schemes usually look somewhere else to recover their losses. A few examples of that include inflated balloon payments or increased ticket price of the cars themselves. So, instead of offering a ‘discount’ on the actual ticket price of the car, dealers will price it higher for the ‘0% finance deals’.

How does PCP finance actually work?

As it is with most things, it’s best to explain using an example.

Let’s consider a situation where you’ve signed up for a PCP of three years to buy a car whose ticket price is £20,000. After paying a deposit of £2,000, the finance company will calculate that the car will be worth at least £8,000 at the end of three years. Here’s how the calculations will look :

To ‘borrow’ the car, you will need to pay these:
Deposit: £2,000
Loan: £8,000 (£10,000-£2,000) plus interest 
Total: £10,000 plus interest

To buy the car, you will need to pay these:
Deposit: £2,000
Loan: £8,000 (£10,000-£2,000) plus interest
Balloon payment: £10,000
Total: £20,000 plus interest

While buying the car at the end of the deal is an option, it’s not the only option. Let’s take a look at the options that buyers have when they take a PCP finance plan.

1. Pay the balloon payment and buy the car –  By paying the balloon payment, you can own the car straightaway. However, most finance companies usually charge an additional fee in that scenario.

2. Return the car and walk away at the end of the deal – Once it’s done, buyers don’t need to pay anything extra (aside from some additional charges such as over-mileage and damage charges).

3. Move on to a new car – Most people availing a PCP deal choose this option. When the PCP deal ends, the car will be worth slightly more than the balloon payment made earlier. In such cases, dealers usually ask buyers if they want to use that ‘equity’ in the form of a deposit on a new PCP deal for a brand new car. For example, if the car’s actual value at the end of the deal is £9,000 and the balloon payment made by the buyer was £8,000, the difference of £1,000 that could be used as a deposit to roll into another deal for another car.

However, the difference in value is never paid out in cash and buyers have to move on to another deal if they want to avail it. However, buyers can buy that car and sell it in the used car market to make some money.

You don’t have to worry about the car being worth less than the balloon payment – that is if it’s lost more value than was expected at the start of the deal. In such a scenario, buyers can just hand the car back and the finance company will have to deal with the depreciation.

Under a PCP finance scheme, what are the charges for handing/trading the car back in?

As mentioned earlier, buyers can face charges if they hand the car back, whether that’s trading it in, or just handing it back and walking away. There are two main types of charges, but both are avoidable:

Over-mileage charges – At the time of the start of a PCP deal, buyers are asked to specify how much they are planning to drive the car every year. This helps the dealer accurately assess the car’s worth at the end of the deal and set the balloon payment value for the customer. A car that’s done thousands of miles will be worth a lot less than a car that’s only done a few hundred.

Going over the agreed mileage limit carries a heavy penalty and it’s very important to be accurate with your predictions at the time of making the deal. Finance companies charge 7p-10p for every mile you are over the predicted mileage. Watch out for this, as 1,000 miles over the expected mileage will see you shelling out £100 at the end of the deal.

Damage charges – Just like when you rent a car, the finance company will check it for damage when you hand it back. While a normal amount of wear and tear because of usage is acceptable, a car which looks like it has been wrecked, will carry heavy penalties. So minor scratches might be fine, but deep dents will require you to shell out your own cash for repairs.

You can avoid these charges by agreeing to a sensible mileage, and treating the car well. If there’s damage, it’s worth going to an approved service centre to see if it’ll cost less to fix than the finance company will charge. In such a scenario, you are better getting it fixed yourself.

The final way to avoid these charges is to buy the car – though that’s not really the most financially sound thing to do.

What are the pros and cons of a PCP finance scheme?

Pros:

• You get to drive and use a new car for lower monthly repayments than what you might need to pay for a personal loan or hire purchase.
• You won’t have to worry about the future trade-in or resale value of the car in the used car market. No matter the depreciation, the lender will guarantee that 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 usually provide service and maintenance packages, warranties and insurance for you to get the total cost of motoring down to just one payment each month.
• A PCP finance scheme may be able to help you buy a more expensive car than you can afford by virtue of the affordable monthly payments.
• PCP deals are usually only offered on new or nearly-new cars, so you won’t have to worry about ending up with a rickety old tub which spends more time getting repaired than being driven.

Cons:

• 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.
• In the case of the predicted minimum future value being set very close to the actual value of the car, buyers will have little to no equity leftover to roll onto another deal for a new car. In that case, buyers 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.
• While the future value is fixed at the start of the deal, it is however, dependent on keeping the car in a (realistically) pristine situation. Anything that falls beyond the scope of normal wear and tear will be charged out of your pocket.

Where to get PCP deals from?

When it comes to getting PCP deals, there are two main methods. The most common one is to get the PCP finance through the dealership you’re buying your car from. However, before you approach your dealer for a PCP finance scheme, it would make sense to look through a few online brokers  who have some decent offers for buyers looking for a PCP finance deal. Even if you don’t buy it straightaway, knowing about your options will help you compare the prices available to you.

Dealer finance:

Also known as forecourt finance, or just car finance, dealer finance is a service offered by almost every car dealership across the UK. PCP finance is also one of the options offered by most dealers. Across the UK, there are three main types of car dealerships: franchised (tied to one or more manufacturers like BMW garages), independent (not tied to any particular brand) and car supermarkets.

Getting a PCP through the manufacturer’s finance arm

When it comes to franchised dealership, most PCP finance (and other) deals are usually arranged through the car finance arm of a car manufacturer. A few such examples are  Ford Credit and Volvo Financial Services. While buying a new car, it’s definitely advisable to look at what the dealerships have to offer on for you. If they have the right PCP finance deal, take it.

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 if you include the balloon payment that will be required at the end, PCPs usually end up being more expensive than a personal car loan or hire purchase.

Getting a PCP through an independent dealership or car supermarket

A lot of independent dealerships and car supermarkets get their finances done from the consumer arms of big banks. This allows them to offer the same range of deals as the dealers who are tied to manufacturers. 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. When you visit such dealerships, you can expect a representative APR ranging between 5% and 10%. It can even be more than that if your credit record is bad.

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 that you calculate whether you can afford the repayments before you commit to a PCP finance deal. It might end up becoming very expensive and more than what you had bargained for in the end.

Online financers:

Financeacar.co.uk – The Financeacar.co.uk site is one of the easier car sites to use. It’s a one-stop shop that allows you to select a car make and model, then the sort of finance you’re looking for, then to configure the car, and finally get a quote for how much it will cost based on your credit record. This company’s deals typically range between 8% and 10% rep APR.

Carfinance247 – As one of the UK’s biggest car finance brokers, Carfinance247 helps you find a deal that is tailored exactly to your budget. For this to work, buyers need to source their cars from a dealer based in the UK. Once that is completed, carfinance247 can find the perfect PCP deal for you.

It has different deals depending on your credit score, with rates starting from 5.8% APR (12.2% rep APR) and going up to 30% APR for people with a bad credit history. This is a high APR and you should see if you could get cheaper credit elsewhere, or find a different way to access a car before signing up to deals with such high interest costs.

Zuto – Broker site Zuto allows anyone to apply for car finance with it, but is especially good if you’d find it difficult to get finance elsewhere, for example, the self-employed, or people with a poorer credit history.

The rate you’ll get depends on how good your credit history is. If it’s excellent, rates are available from 9.9% rep APR. But, poor credit scorers could end up being charged 34.3% APR. Again, like the above, this is a really high APR, so always check you can’t get cheaper credit elsewhere, or find another way to get a car.

Carzu – When it comes to getting a broker to look after the process of searching for the right car, as well as finding the right finance scheme for your budget, Carzu is definitely one of the better options available (Carzu can also be used just for finance). APRs depend on the amount you might want to borrow. However, rates in general start from 4.8% rep APR.

Halifax Bank – Although not an online broker, Halifax offers a Flex Car Plan PCP deal, which provides a similar service, although it’s only for its current account customers at the moment. As with the other financing methods here, Halifax will send the cash straight to the dealer you’re buying from. This means it will therefore own the car until the end of the deal. Halifax’ Flex Car plan has a 3.4% representative APR.