What are the disadvantages of a PCP?
The reason that car dealers and car manufacturers push the PCP so hard is that it is generally good news for them, rather than being good news for you.
A PCP almost always works best if you follow the agreement to its conclusion and change it then, rather than earlier or later. So you are pretty much locked into having to change your car exactly at the end of the term, even if that’s not especially convenient for you at the time.
It’s not great if you want or need to change your car early (see below), as your monthly repayments are not enough to cover the car’s early rate of depreciation – especially for new cars – as well as all the interest on the loan.
A PCP is also not great if you want to keep your car at the end of the agreement, as you will have to pay a large chunk of money to settle the rest of the finance (the balloon amount). If you don’t have this amount of money handy (and most people don’t), you have to borrow more money to pay off the balloon. Yet you have already paid interest on the balloon amount, so you are paying more interest on that money all over again.
If you want to claim the Guaranteed Future Value and return the car, you must have complied with the mileage allowance. The car must also have been fully serviced – on time, every time – by a franchised dealership (not an independent garage). Finally, you must return the car in good condition, as any damage beyond normal wear and tear will be charged to you and it will not be at mates’ rates!
A PCP is a form of secured finance, meaning the money borrowed is secured against the vehicle which belongs to the finance company at all times until the final balloon is paid out (unlike a personal loan, which is unsecured). If you want to sell the car yourself, rather than part-exchanging it or giving it back to the finance company, it can be tricky because it’s not actually your car to sell. Some finance companies will have specific requirements about how you go about selling their vehicle and settling your debt.
Because the car belongs to the finance company, you can’t change the registration details (for example, transfer the car from your name into your spouse’s name) and the person borrowing the money must be the registered keeper and main driver.
The car must be kept fully comprehensively insured at all times, with the finance disclosed to the insurer, and the insurance must also in your name as the registered keeper, so you can’t have the car registered in someone else’s name or at a different address.
Can I settle my PCP early?
Yes you can, but the important thing you need to remember is that the finance company does not guarantee the value of the car against your settlement until the conclusion of the agreement. For example, if you want or need to sell your car two years into a four-year agreement, you will have to pay any difference between what your car is worth and what you still owe (called negative equity). So if your car is worth £20,000 but your finance settlement figure is £22,000, then you will have to pay the extra £2,000 to clear your negative equity.
There is usually a charge to settle a PCP early, but it is not normally large. Some finance companies also allow you to pay in lump sums during the term, to either reduce your monthly payments or bring the end-date forward. Some allow it with no charge, some will charge you for it and some don’t allow it at all. Make sure you check before you sign up!
Is a PCP right for me?
You need to make sure you properly understand any finance agreement before you sign up for it. Be aware of exactly how much you are paying in interest and fees, and make sure you are not over-stretching yourself. If that means that you can’t afford the car of your dreams, then so be it. There will always be additional expenses when running a car, and if you can’t afford to eat because your monthly car payment is due then you have made a fairly fundamental error.
Broadly speaking, if you are likely to change your car in a few years’ time, then a PCP can be a cost-effective way to finance it. If you are going to keep it for longer than that, then you may well be better off with an HP and pay the car off in larger equal installments instead of a few years of lower payments then a big hit at the end.
Read the finance documents carefully and make sure you are comfortable with the numbers offered. Ask as many questions you like before you agree to anything to make sure you understand the full implications of the agreement, as it is better to feel silly before you sign up than feel very stupid afterwards!
This is another great article to read before taking out a PCP:
The Car Expert’s Ten Golden Rules for buying a car
This article was first published in 2013, and has been overhauled and updated in May 2016 based on feedback from hundreds of comments posts and forum questions.
Some names given by manufacturers to their PCP plans
Alfa Romeo Preferenza, Audi Solutions, BMW Select, Citroën Elect, Fiat I-Deal, Ford Options, Honda Aspirations, Infiniti Selectiviti, Jaguar Privilege, Jeep Horizon, Kia Access, Land Rover Freedom, Lexus Connect, Mercedes-Benz Agility, MINI Select, Mitsubishi Alternatives, Renault Selections, SEAT Solutions, Škoda Solutions, smart Agility, Suzuki Driveplan, Toyota AccessToyota, Vauxhall Flexible PCP, Volkswagen Solutions, Volvo Advantage.
Most car finance agreements in the UK are regulated by the Financial Conduct Authority, and anyone involved in the selling of car finance must be accredited by the FCA. You should always consider the terms and conditions of any agreement carefully before taking out any form of car finance, as you are making a substantial ongoing commitment and there may be significant costs if you change your mind or are unable to meet your commitments at a later date.