Personal Contract Purchase (PCP) Explained
A Personal Contract Purchase (PCP) agreement is one of the best ways to get a car without paying for the full cost of it upfront. It is now the most popular way to finance cars in the UK. It is one of the more flexible forms of car finance and is a great choice for people who like to change their car regularly. This guide will help you to understand how it works, and whether it's the right option for you.
In this guide:
What is a hire purchase?
A personal contract purchase is one of several ways to finance a car. It is similar to a hire purchase agreement, in that you must pay an initial deposit and then regular monthly instalments for a set period.
However, you don't actually pay for the value of the car itself. Instead, you pay off the difference in the value of the car from when you buy it to when the contract ends. Therefore, with a personal contract purchase deal the monthly repayments are usually lower than other forms of car finance, although you won't own the car at the end of the term. You do, however, have an option to keep the car by paying a lump sum when the contract ends, known as a balloon payment.
How does personal contract purchase work?
Step 1: Credit Check
Before you're accepted for a PCP agreement, you will have to pass a credit check. Bear in mind that a credit will stay on your record and too many of these could negatively impact your credit rating, making it more difficult for you to take out loans in the future, including mortgages. You should also make sure that you can afford to make the monthly payments regardless of the credit check, as it only checks your credit history and not your current financial stability.
Step 2: Deposit and Contract Set Up
If you pass the credit check, you will then have to pay a deposit. This is usually around 10% of the total value of the car. If you are getting a new car from a franchised dealership - one that is affiliated to a certain car manufacturer - you could be offered a deposit contribution'. This typically comes to around £500 to £2,000.
When setting your contract, the dealership or car finance broker will estimate the value of the car by the end of the agreement, known as the Guaranteed Minimum Future Value. Personal Contract Purchase agreements usually last between two to five years. The size of your loan will be calculated by the depreciation in the car's value (initial value minus the GMFV) minus the deposit. You will pay this off in fixed monthly instalments over the course of your term, plus interest. The APR on personal contract purchases is typically between 4%-7%.
During the PCP term, you will be able to use your car, but you are essentially just hiring it from the finance broker. You will usually have pre-agreed mileage restrictions, which are there to protect the GMFV. Breaking the mileage restrictions can be very costly, often between 7-10p per mile. You must also be careful to not damage the car, as you will be charged for this at the end of the contract, much like you would with a rental company. General wear and tear is usually acceptable.
Step 3: After the Term Ends
When your personal contract purchase agreement ends, you have three options of what to do next. You can either hand it back to the dealership or finance broker, make the balloon payment in order to keep the car, or use the car's value as a deposit on a new personal contract purchase.
If you want to own the car, you will need to make the balloon payment which can often be in the thousands of pounds. You should start saving at the beginning of the agreement to make sure you have enough if you want to keep the car. Otherwise, you may have to take out another loan to pay for it.
Most people get a new car when their personal contract purchase ends. It's often the case that the value of your car at the end of the deal is slightly higher than the balloon payment. The difference in value could be used towards a deposit for a new personal contract purchase. For example, if the car is worth £10,000 at the end of the deal, but the balloon payment is only £8,000, then you could use the difference of £2,000 to pay for your deposit on your next car.
Is a personal contract purchase the right option for me?Most people who don't take out a personal contract purchase agreement don't end up buying the car. If you want to change your car regularly, then it can be a good option and is often cheaper than other car finance agreements if you're not planning to buy. Before you decide to get a personal contract purchase, have a think about the pros of cons of getting such a deal.
- Allows you to drive a car that you might not otherwise be able to afford.
- Monthly repayments are cheaper than on a hire purchase agreement or a personal car loan.
- Monthly repayments are fixed, so you know exactly how much you're spending each month.
- You have the choice at the end to either buy the car, give it back, or get a new car.
- Makes it easy and affordable to change your car every few years.
- Balloon payment is agreed beforehand, so you don't have to worry about the value of your car depreciating too much.
- You don't own the car during the agreement, so you can't do what you like with it.
- The balloon payment can be a huge lump sum, so you will need to have a lot of savings if you want to buy the car.
- There are usually mileage restrictions which are expensive to exceed.
- If you damage your car, you will be charged to repair it at the end of your agreement.
Where can I get a personal contract purchase?
You can either get a personal contract purchase deal from a dealership or an online finance broker. It's worth shopping around to find the best deal, and before you go to any dealership you should check quotes online beforehand so you can get a good idea of what you can get.
You should use our PCP comparison service to get a list of deals available from online brokers.