Are you looking for the best guide on the internet to personal contract purchase (PCP) car finance and how it works? Are you unsure about the jargon car dealers use? And what are the real implications for your finances?
Well, we’ve comprehensively overhauled The Car Expert’s guide to how a personal contract purchase works.
This article has been the most popular piece at The Car Expert for the last three years. So we decided it was about time to give our guide to “What is PCP car finance?” a thorough overhaul and update.
This guide will help you understand everything there is to know. But if there’s anything you’re not sure of by the end, ask us a question in the comments below.
The PCP (personal contract purchase or personal contract plan) is the most popular car finance product on the UK market for both new and used cars. Most car manufacturers and car dealerships push PCPs pretty hard. But what is PCP car finance? How does it work and what should you be looking out for?
The Car Expert has previously looked at different types of car finance available. But it’s clear that many thousands of people are unsure how a PCP really works, despite the number of people who use a PCP to buy a car.
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’ve produced this most excellent glossary:
At most dealerships, PCP car finance is usually offered by the manufacturer’s own finance company. The offers tend to be much better on new cars than on used cars. That’s because car manufacturers are far more interested in selling you a new car than one they built a few years ago.
There are other lenders who also offer PCPs, but 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. It’s often incorrectly referred to as a personal contract plan (rather than purchase).
In a traditional hire purchase agreement, you pay off the entire value of the car in equal monthly instalments. A PCP differs in that you have lower monthly instalments that only cover the car’s depreciation, and then a very large final payment at the end.
This final payment is often known as the balloon (also known as the Guaranteed Future Value, but that’s actually a slightly different thing). You have several options as to how to deal with this final amount, depending on whether 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). The fees for both finance products are usually about the same 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 your debt via your monthly repayments. This means:
- Your monthly payments will be much lower, and/or
- Your initial deposit will be much lower, and/or
- Your repayment term will be shorter
Most people tend to change their cars about every three years. Most buyers also have a reasonably small deposit to put down. For this sort of situation, a PCP gives you a much lower monthly payment than an HP. However, there is a large caveat – at the end of the agreement, you have to take action of some sort to settle the outstanding debt (the balloon). If you don’t, you will be stung hard.
This means that on a PCP, the same car costs considerably less per month to finance than on an HP. Alternatively, you can buy a more expensive car for the same monthly payment. This is what makes a PCP so attractive to car buyers.
For a car dealer or car manufacturer, a PCP has two main benefits:
- Lower monthly payments on a PCP mean more customers can afford more of their cars
- Customers can’t usually afford to pay off the balloon amount, so they are effectively forced to buy another car on another PCP. As a result, the dealer/manufacturer has a good opportunity of securing repeat business.
Next page: Breaking down the PCP