What is Personal Contract Purchase Car Finance?

by ChooseMyCar Staff Writer

When you’re searching for a new car online or at a dealership, there are three letters that always seem to spring up: PCP. Sure, it’s a way of financing a car but, beyond that, do you know what it means and how it works?

What is Personal Contract Purchase Car Finance?

What’s in a Name?

PCP stands for Personal Contract Purchase. It’s a mouthful and it sounds kinda dry so finance companies and dealerships abbreviate it to PCP. Financiers love an acronym.

The key word there is “Personal”. There’s not much you can change about most Car Finance deals but a PCP is more flexible. You have options.

Those options could help you to drive off in a car you may never have expected to afford, with a finance structure that brings down the monthly cost of financing a vehicle.

How Does it Work?

  1. The Dealership or Car Finance Company calculates how much your car will be worth at the end of your contract, taking into account depreciation, wear and tear, the specification of your vehicle etc. This is called the “Balloon Payment”.
  2. You pay a deposit on your car. This is usually around 10% of the total cost of the vehicle, though you can negotiate how much you can afford.
  3. The Dealership or Car Finance Company subtracts your deposit and the Balloon Payment from the upfront cost of the car and divides what’s left by the number of months in your contract, plus APR. This becomes your monthly payment.
  4. When you’ve paid this off you have three choices: Pay the Balloon Payment and keep the car, hand the car back and walk away or continue the agreement with a new car.

That’s a Lot of Options

It is indeed. 

PCP car finance deals are particularly good for people looking at brand new cars, which are often too pricey to buy outright. A PCP allows you to spread part of the cost of a vehicle over a few years, bringing your monthly costs way down.

This can be particularly useful for the new breed of Electric Cars, which are often a few thousand pounds more expensive than their Petrol and Diesel equivalents. With residual values generally much stronger for EVs, the Balloon Payment tends to be higher, taking more money out of the space between, lowering the monthly cost.

In fact, if specified with identical interior and safety tech, EVs are generally only a few pounds more per month on a PCP, when compared to a Internal Combustion stablemate. 

On the Upgrade.

If you plan to upgrade your car every few years, a PCP makes perfect sense. Cars are developing quickly - faster now than they have since their creation over a hundred years back. With Electric Cars now surging, and the government banning sales of Diesels and Petrol cars entirely by 2035, a new car in three years will look very different to the one you buy today.

This is the biggest advantage of a PCP.

If, after 3 years, you want to hand your car back, the Dealership or Finance Company still has your deposit and your car. They can put that credit towards another PCP. You could choose the same model and model year again, making payments less a month (as second hand cars have already depreciated), or choose a brand new one. You could find that the brand new car comes with the same monthly payments as before.

What If I Want to Buy?

You can. 

Pay the Balloon Payment and the car is yours but be aware that this payment is a single lump sum and could be many thousands of pounds. 

The advantage of doing this is that you then own the asset and can sell it on, making some of this money back when you’re ready to move on. 

You won’t own the car, and you can’t sell it on to recover some of your money, if you don’t pay the Balloon Payment at the end.

Which is fine.

If you’ve financed a second hand car and the dealership has got their sums wrong, the car might be worth less to sell than the Balloon Payment would cost you. The opposite is also true: your car might have depreciated less than the dealership thought it would, making the Balloon Payment an absolute steal.

It’s worth checking what the resale value of your car is before making your choice.

 And there you have it: all things PCP.

If you have any questions, just pick up the phone and chat to a member of our team. Take a look at the main site to see what deals are available to you. 

Until next time, stay safe on the road.

Author

ChooseMyCar Staff Writer

ChooseMyCar Staff Writer

Model reviews, buying guides, service tips, and auto news - straight from our team of car experts.

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