Personal Contract Purchase (PCP) is the most common and popular form of car finance and way to buy a car in the UK through a dealer.
Used by 78% of UK motorists, PCP involves paying an initial deposit, monthly payments and the option of making a balloon payment if you want to own the vehicle outright at the end of the term.
With most types of car finance, there are pros and cons and it is important to know how this type of finance works and what you are applying for.
How PCP works:
- Initial deposit – Usually a minimum of 10% deposit required, although some dealers may offer contributions towards this. You may be able to cover your deposit by part-exchanging an existing vehicle. The higher your initial deposit, the lower your monthly payments thereafter.
- Monthly payments – Set according to your budget and affordability, they are calculated in line with your deposit and together they pay off the car’s predicted depreciation over the term of the contract.
- Balloon payment – You have the option of the making one large balloon payment at the end of the term if you want to own the vehicle outright. The balloon figure is based on what the car should be worth at the end of the term, known as the Guaranteed Minimum Future Value (GMFV).
A PCP agreement will typically last for around 3 or 4 years and you have the option to cancel or settle early at any point, however fees may apply.
The pros of PCP
Quick and easy – PCP is one of the quickest and easiest ways to get on the road, hence its popularity. Your initial costs are quite low to get started and if you can take advantage of contributions from the car dealer, you can get a very good deal.
Can do part-exchange – A lot of dealers are willing to accept part-exchange of your vehicle, including those that work with Quick Car Finance. This can be used to pay towards the deposit and lower the monthly costs of your new car bought on PCP.
Option to own the car outright – Your balloon payment option means that you can eventually own the car outright if you would like to, or you can always give the car back and upgrade for a newer model.
Cheaper per month than HP – Compared to the closest alternative for car finance, which is Hire Purchase (HP), your monthly costs are typically a lot lower, however, it will be more expensive if you are looking to own the car outright.
Give it back at the end – If you do not want the car any longer at the end of the term, you can simply hand it back to the dealer, opt for a new car or a new manufacturer completely.
The cons of PCP
Balloon payments are too high – For some motorists, the balloon payment can be too high and it may not make financial sense to buy the vehicle outright. For this reason, a lot of drivers will trade in their car for another, newer model. Dealers love the PCP structure because it keeps customers coming back every 3 years or so. The downside though is that if you want to own the vehicle outright or maybe you have become attached to the vehicle, it will be expensive to keep it.
You can be penalised for any damages – When it comes to making the balloon payment, if there are any damages to the car such as dings or dents, or there is excessive mileage, there will usually be penalties added to the final sum. This might seem counterintuitive, given that you will be essentially buying the car which is worth less, but this is common in PCP deals.
You might be tied down with that dealer – If you are looking to trade in your car at the end of the term, you may be tied down with that dealer or face higher costs if you were starting from scratch elsewhere. If you didn’t particularly like the car manufacturer or have other requirements in terms of size and modification, this may be less than ideal.
Struggle to pay? We’ll take it away – If you fall into difficult financial circumstances, such as losing your job, and you cannot keep up with repayments, your vehicle may be taken away eventually and you will not be the owner of the vehicle any more. Car finance providers will offer forbearance and taking a payment holiday or making a new repayment plan is not uncommon, but customers should be aware of the risks.
What happens when your PCP deal ends?
When your PCP deal ends (usually after 3 years), you have the option to make a balloon payment to own the car outright or hand back the car to the dealer and purchase a new one.
If you prefer, you can go to a different dealer, manufacturer or have no car altogether – you have lots of options.
Is PCP right for me?
PCP is ideal for someone who is looking to buy a car and get on the road with minimum costs. If there is a shiny new car that you have your eye on and would like to park in the driveway, PCP is a viable option. If you enjoy changing models frequently, such as every 3 years, this could be an effective option for you.
If you are someone who is price-sensitive and interested in owning the vehicle outright, PCP may not be the best option. Instead, using Hire Purchase (HP), which comes with slightly higher monthly payments, means that you will own the vehicle outright at the end of the term.
What else can be included in a PCP deal?
You can often request or negotiate for warranty packages or servicing with your PCP deal. The dealer may be able to cover a certain value per year when it comes to dents and dings – and this can be quite a saving.
How can Quick Car Finance help with PCP deals?
At Quick Car Finance, we are an innovative and transparent car finance broker who will help you get the most competitive rates possible when purchasing a new car.
We assess every customer based on their budget and credit status and offer the most cost-effective option for their dream vehicle.
When you check your eligibility online, we will present you with a list of options, including PCP, HP and personal loans. We also check the specific vehicle and the dealer before each purchase and ensure that everything is smooth from start to finish.