The PCP (personal contract purchase, sometimes called a personal contract plan) is by far the most popular car finance product on the UK market for both new and used cars. Most car manufacturers and car dealerships push this type of car finance pretty hard. In fact, car sales executives tend to be more interested in your monthly budget than which car you want.
But what exactly is a personal contract purchase? How does it work, why is it so popular and what should you be looking out for? This guide will help you understand everything you need to know about PCP car finance.
More than 86% of all private new car buyers finance their purchase at the dealership, and the vast majority of those finance agreements are PCPs. Yet research from 2015 found that a staggering 88% of men and 75% of women could not explain what a PCP was, and a more recent study found that nothing has changed, with about 90% of people not understanding the fine print in their finance contracts. Even the media regularly get tripped up trying to explain how PCPs work when they report on car finance issues.
So it’s clear that millions of car buys in the UK are unsure how a PCP really works, despite the fact that they are taking out a PCP agreement for thousands of pounds to buy a car. The good news is that if this applies to you, 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 new car 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. They also have various different names for their PCP offerings, which can be confusing,
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 personal contract purchase is a specific type of hire purchase (HP) finance agreement, and it will often be shown on a finance contract as a hire purchase. It’s often incorrectly referred to as a personal contract plan (rather than purchase).
Like a regular hire purchase or a mortgage on your house, a PCP is a secured finance agreement. That means that the finance company ultimately remains the owner of the vehicle until the last penny has been paid off.
In a traditional hire purchase agreement, you pay off your entire borrowing in equal monthly instalments. A PCP is different in that you have much lower monthly instalments that only cover the car’s depreciation, followed by 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, you are generally borrowing the same amount of money. The big difference is that you are paying off a much smaller amount of your debt via your monthly repayments and deferring a large amount (the balloon) to the end of the agreement.
Let’s say you are buying a new car that costs £21,000, and you put down £1,000 as a deposit. That means you are borrowing £20,000. With a hire purchase, you repay this £20,000 (plus interest and fees) in equal monthly instalments. With a personal contract purchase, you might only pay back £12,000 in monthly payments, and then have an £8,000 final payment to deal with.
- 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 to four years. Most buyers also have a reasonably small amount of cash available to put down as a deposit. For this sort of situation, a PCP gives you a much lower monthly payment than an HP. Alternatively, you can buy a more expensive car for the same monthly payment. 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.
For a car dealer or car manufacturer, the personal contract purchase 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