The PCP (personal contract purchase) is the most popular car finance product on the market in the UK, and it is the one pushed by virtually every manufacturer and car dealership. But how does it work and what should you be looking out for?
This article has been the most popular piece at The Car Expert for the last three years, so I decided it was about time to give our comprehensive guide to the PCP a thorough overhaul and update.
The Car Expert has previously looked at different types of car finance available, but it is clear that many people are still unclear about the PCP, despite the number of people who use them for financing their car purchase. In fact, research from 2015 suggested that a staggering 88% of men and 75% of women surveyed could not explain what a PCP was. The good news is that if you fall into that category, you’re certainly not alone! If you want to brush up on your car finance jargon, we have produced a most excellent glossary which you can visit by clicking on this button:
At most dealerships, the PCP is usually offered by the manufacturer’s own finance company. The offers tend to be much better on new cars than on used cars, as the manufacturer is more interested in selling you a new car rather than one they built a few years ago. There are some other lenders who offer PCPs as well, although they are not normally competitive with manufacturer finance on new cars.
What is a Personal Contract Purchase?
A PCP is a form of car finance based on a Hire Purchase (HP) agreement. However, instead of paying off the entire value of the car in equal monthly instalments like an HP, you are effectively only paying off the depreciation via your monthly instalments on a PCP. At the end of the term, you still have a large amount amount outstanding (often known as the balloon). You have several options as to how to deal with this final amount, depending on whether or not you want to keep your car or change it.
In comparing a PCP and HP, you are usually borrowing the same amount of money and paying a similar amount of interest (usually slightly more on a PCP due to how the repayments are worked out). The fees are usually about the same for both a PCP and HP as well.
What is the attraction of a PCP?
If you compare financing the same car on a PCP against an HP, the big difference is that you are paying off a much smaller amount of money via your monthly repayments. this means you can have a much lower monthly payment and/or a lower initial deposit and/or a shorter repayment term.
Most people tend to change their cars about every three years. Most buyers financing a car have a reasonably small deposit. For this sort of situation, a PCP will give a much lower monthly payment than an HP, with the caveat that at the end of the agreement you will have to take action of some sort to settle the outstanding balance. This means that on a PCP, the same car will cost considerably less per month to finance than on an HP, or alternatively you can buy a more expensive car for the same monthly payment. This is what makes a PCP so attractive to the car buyer.
For dealers and manufacturers, a PCP has two great benefits: 1) the lower monthly payments mean that more of their customers can afford more of their cars; and 2) the final balloon payment at the end means that customers will, in all likelihood, buy another car on another PCP, giving the dealer/manufacturer a good opportunity of securing repeat business.