Personal Contract Purchase (PCP) Car Finance

Quick answer: Personal contract purchase (PCP) spreads a car’s depreciation and interest across a deposit and monthly payments. At the end, you can return the car, start another agreement or make the balloon payment to own it. Compare the interest rate, total cost, mileage limit and final payment before choosing PCP finance.

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PCP car deals vary by lender, vehicle and your personal situation. This guide covers the checks lenders make, ways to lower your monthly payments, how PCP compares with hire purchase, and what to look for before you apply.

What is PCP finance?

Personal contract purchase, or PCP, is a type of car finance that lets you use a car for an agreed period. You pay a deposit and monthly instalments, then choose whether to return the car, replace it or buy it.

PCP finance can offer lower monthly payments than a personal loan or hire purchase (HP). Your monthly payments cover the car’s expected drop in value, plus interest, rather than its full price.

The finance company owns the car during the agreement. If you miss repayments, it could repossess the vehicle. You’ll only own the car if you make the final balloon payment and pay any other fees in your agreement.

How does PCP finance work?

PCP car finance has three main parts: a deposit, monthly repayments and an optional balloon payment. Your deposit, contract length, mileage limit, interest rate and the car’s expected future value affect what you pay.

PCP car finance deposit

Many PCP agreements ask for a deposit of around 10% of the car’s price, though the amount varies. A larger deposit reduces the amount left to finance and can lower your monthly payments.

The amount you borrow

The amount financed is the car’s price minus your deposit. Your monthly repayments cover the value the finance company expects the car to lose during the agreement, plus interest. PCP agreements usually last between 24 and 36 months, although terms vary.

The finance company estimates the car’s value at the end of the contract and calls this the Guaranteed Minimum Future Value (GMFV). Your agreed mileage affects that estimate.

The lender usually calculates interest on the car’s price minus your deposit, including the amount left for the balloon payment. Check the total amount you’d pay before signing.

The final balloon car payment

The final balloon car payment is the amount you pay at the end if you want to own the car. The finance company sets it when the agreement starts, based on the GMFV.

A balloon payment can be much larger than your monthly repayments. Check the amount before you sign and plan how you would pay it. Refinancing the payment would mean taking out more credit, which could add interest and fees.

At the end of the agreement, you can:

• Pay the balloon payment and keep the car.
• Return the car. You may face charges if you exceed the mileage limit or the car has damage beyond fair wear and tear.
• Part-exchange the car and start another PCP agreement. If the car is worth more than its GMFV, the dealer may let you use the difference towards a new deposit.

Review your options at the end of a PCP agreement before the contract ends.

How to lower your monthly PCP car finance payments

Several parts of a PCP agreement affect your monthly payments:

• Depreciation: A lower-priced car that holds its value can cost less each month, because it may lose less value during the agreement.
• Deposit: A larger deposit reduces the amount left to finance. Check that paying more upfront still leaves room in your budget.
• Contract length: A longer term can lower each monthly payment, but you could pay more interest in total.
• Mileage limit: A lower limit can reduce the monthly cost. Choose a realistic figure because excess mileage charges can apply.
• APR: Compare the annual percentage rate (APR) and the total amount payable. APR includes the interest rate and compulsory charges.

What you need for PCP finance

A lender will ask for information and documents to assess your application. You might need to provide:

• Personal details: Your full name, date of birth, marital status, residential status and address history for the past three years.
• Employment details: Your employment history for the past three years, including employer names and addresses, job titles and income. If you’re self-employed, the lender may ask for accounts or other proof of income.
• Bank details: Your account number and sort code for the bank account you’ll use to make payments.
• Identification: Your driving licence, proof of address and proof of income.

Missing or incorrect information could delay your application or lead the lender to decline it.

How is PCP different to other types of car finance?

PCP monthly payments cover the car’s expected depreciation, plus interest. You can return the car at the end or pay the balloon payment to own it.

With hire purchase, your repayments cover the car’s price, plus interest. You own the car after making all the payments and any final fee. HP payments can be higher because you are paying towards ownership from the start.

PCP car finance and car leasing work differently. Both let you use a car for a set term. PCP gives you the option to buy the car, while a lease requires you to return it.

Use our PCP and HP car finance comparison guide to see how each option works.

How to compare PCP car finance

Compare PCP car deals by looking beyond the monthly payment. Check the deposit, contract length, APR, total amount payable, mileage limit and final balloon payment. Two car PCP offers with the same monthly cost can have different upfront and end-of-contract charges.

You can also compare PCP with the different types of car finance. A personal loan, credit card or HP agreement may suit your plans better.

Before you apply, check your Experian Credit Score and Experian Credit Report. A higher score could improve your chances of getting a lower rate, but each lender uses its own criteria. Our tips on how to improve your score can help you prepare.

When you’re ready, compare car finance with Experian. Searching is free, takes less than two minutes and won’t affect your credit score. We’re a credit broker, not a lender.

FAQs

Can I get zero deposit PCP car finance?

Some lenders offer zero deposit PCP car finance, but you may have fewer deals to choose from. With no upfront payment, you finance more of the cost, so your monthly payments and total interest could be higher. Read more about car finance with no deposit.

How do I find low deposit PCP deals?

Compare the deposit alongside the APR, monthly payment, total amount payable and balloon payment. Low deposit PCP deals reduce the amount you pay upfront, but they can increase your monthly payments and total borrowing cost.

Can I get PCP finance for second-hand cars?

Some dealers and lenders offer PCP finance for second-hand cars. Lenders often consider the car’s age, mileage and value when deciding which deals and contract lengths to offer. Compare PCP with HP or a personal loan and read our used car finance guide.

What is a balloon payment for car finance?

A balloon payment is the optional final lump sum you pay to own the car at the end of a PCP agreement. The lender sets it at the start using the car’s estimated future value. If you return or part-exchange the car, mileage or damage charges may still apply.

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