What is PCP car finance?

Roman Danaev

With several different car finance options available, choosing the right type of loan for you can often seem like a minefield. We’ve broken down all the key points on one of the most popular types of car loan, Personal Contract Purchase (PCP) so that you can make an informed decision as to whether this is the right type option for you.

What are PCP Car loans?

Similar to hire purchase agreements, PCP loans mean that the borrower will not own the vehicle until the end of the agreement. An initial deposit is made, usually around 10% of the car’s value, following by fixed monthly instalments as laid out in the agreement.

Once the agreed contract term is over, the borrower may either choose to make a final outright payment to purchase the car (balloon payment) or can hand it back to the dealer and then take out another contract on a different car.

Whether you decide to make a balloon payment or hand the vehicle back will depend on the predicted value of the car once your contract is over. If it’s not worth much at the end of the contract, you can pay another deposit and then swap it in for a newer model.

So, in a nutshell

It might seem a little complex but PCP car loans can be understood easily by breaking it down into three key parts:

  • Deposit — Those offering PCPs will normally ask for 10% of the car’s value as an initial deposit.
  • Amount borrowed — The car finance provider will predict how much value the car will lose during the contract term and then decide on a loan amount based on this. A contract term is normally 24 months or 36 months
  • Balloon payment — This is the remaining balance that will be paid if you wish to purchase the car at the end of the contract. It is sometimes called the Guaranteed Future Value (GFV) and dealers work it out by predicting the car’s value after depreciation, once the contract is over. The balloon payment is agreed at the beginning of the loan deal. You can choose whether you want to pay this to own the car at the end or start a new contract on a new car.

What happens when the contract is over?

There are three options to choose from when your contract has come to an end. You can:

  • Purchase the car with the balloon payment and you will become its proud owner.
  • Hand it back with nothing else to pay, unless there is damage beyond normal wear and tear, or you have exceeded the agreed mileage limit (you’ll usually get charged between 7-10p for each mile you exceed), in which case you’ll probably have to pay some surplus fees.
  • Take out another PCP contract and get a new car. It is common for the car to be worth a little bit more than the balloon payment once the PCP deal has ended, in which case, many dealers will allow you to use the remaining equity as a deposit for the new loan contract on the new car.

Most people who have already completed a hassle-free loan term will go for the third option. Unfortunately, there isn’t an option to take the extra equity and keep it as cash. The only way to do this would be if you were to purchase the car and then go on to sell it privately.

How can I make repayments as low as possible?

There are ways to ensure your loan repayments are low. You can, of course, choose the cheapest car. But aside from that, the best option is to pay a large deposit or spread the repayments out for a longer period of time. Another way is to choose wisely and pick a car which can hold its depreciation value for longer. Additionally, setting a lower mileage limit (provided you can stick to it) will also mean lower repayments.

What if I want to end my contract early?

You have the option to settle the contract early, but this normally means you’ll have the pay off the difference between the current value of the car and the remaining balance owed — this is known as ‘negative equity’. For example, if the vehicle is worth £16,000 at the moment, but your settlement amount is £20,000, you will be required to pay the remaining £4,000.

Such early repayment charges will be outlined in your contract and should be well-thought-out and discussed prior to the PCP agreement.

Who are they best for?

PCPs are one of the most flexible finance types, as there are several options at the end of the term, including the ability to buy the car. They are tailored to your individual financial situation, with suitable repayment terms made accordingly – even people with bad credit or customers with CCJ’s can be considered.

They are also ideal for people who like to change their car every 2-3 years but still seek relatively low monthly payments to fit their personal budget. Essentially, PCPs allow people to quickly get behind the wheel of new or almost-new cars at a cheaper price than they might normally be able to afford.

On the other hand, if you are someone who would rather keep the same vehicle but pay more each month, then perhaps you’re better off going for a hire purchase (HP) agreement or personal car loan, where the car is yours to keep once the payments have been made.

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