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Adam Jolley

A guide to personal contract purchase (PCP)

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PCP is often viewed as a complicated way of financing a car, but it doesn’t have to be. Here we explain what it is, how it works and look at some of the pros and cons.

Car financeWhat is PCP?

Personal contract purchase, or PCP for short, is simply a form of finance that allows you to loan a car from a finance company.

How does it work?

PCP works in a similar way to a hire purchase (HP) agreement.

You’ll be asked to pay an initial deposit followed by monthly payments for a set period.

Most PCP deals are available for anywhere between 18 and 48 months, although 36 months is pretty typical. 

Usually the higher deposit you pay, the lower your monthly payments will be.

What’s the difference between PCP and HP?

Despite some similarities, there’s one major difference when it comes to PCP and HP.

Instead of paying off the entire value of the car in monthly instalments, as you would with an HP deal, with PCP you’re only paying off the depreciation. 

In other words, all you pay is the difference between what the car’s worth at the start of the agreement and what the dealer says it’ll be worth at the end.

This is often known as its “guaranteed minimum future value”. 

So I don’t actually own the car?

No. 

As you’re effectively only renting the car from the finance company, you don’t own the vehicle while you’re making your monthly payments.

You also won’t automatically own the vehicle at the end of the payment term, unlike with an HP deal.

If you do decide you want to keep the car at the end of the agreement, you’ll need to make what’s known as a “balloon” payment. 

This will cover the cost of the vehicle, and it’s this payment that transfers ownership from the finance company to you. 

It’s worth noting, in addition to the balloon payment, some finance companies may charge an admin fee if you wish to buy the car at the end of the agreement. 

What are the pros of PCP?

One of the main attractions of PCP is that monthly payments are typically lower than you’d find with an HP deal. 

This is because your instalments are paying off a much smaller amount of money than they would with HP.

And, as monthly payments tend to be more affordable with PCP, this often allows people to drive a higher-spec car.

What are the cons of PCP?

As mentioned, you don’t own the car during the contract period, and you’ll have to pay the balloon payment at the end of the term in order to own the vehicle outright.

However, in reality not many people end up paying this. And indeed the cost can be prohibitive for some.

Instead, most drivers are happy to opt for a new PCP deal at the end of the term, which makes it best suited to those who wish to change their car every few years.

Therefore PCP is probably not the best choice for people that wish to actually own their car.

Is there anything else to know?

Because the value of the vehicle at the end of the term is important, so is the condition of the car and its mileage. 

Therefore it’s definitely worth being aware that almost all PCP deals come with an annual mileage limit, which you’ll need to agree upon at the outset.

If you go over this agreed limit you could end up paying additional charges – which may work out at up to 10p per mile in some instances.

In addition to mileage, depreciation is also based on the vehicle staying in good condition. 

So if you don’t take care of the vehicle, it’ll depreciate more and you’ll be left with a gap to fill at the end.

There may also be financial penalties if you wish to change your car before the end of the agreed term, so it’s worth checking any contracts carefully.

Can I get a deal if I have a poor credit history?

Your credit history is taken into account when you apply for car finance

But even if you have poor credit, or you’re completely new to it, it doesn’t mean you’ll be rejected.

Instead, it’ll probably mean that your monthly payments and/or the amount you repay overall are higher than some of the rates you’ve seen advertised. 

All in all, there are lots of different ways to pay for a new car.

And with so many options available most people will be able to find something that fits their needs.

You can see tips in our guide to improving your credit rating.

Is PCP the right option for me?

Buying a car using PCP is often seen as an aspirational purchase: drivers tend to get a higher-spec car for lower monthly payments than they could with other forms of finance.

This makes it a good choice for people who wish to drive an upmarket car which they can change every few years.

However, the fact you don’t automatically own the vehicle at the end of the term, coupled with restrictions such as annual mileage limits, means it’s worth checking out the finer details carefully to make sure it’s the right option for you.

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