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Car finance: Top 10 PCP myths busted

The personal contract purchase (PCP) is by far the most popular way for consumers to buy new cars, and is rapidly becoming the most popular way to finance used cars as well.

But the PCP is really not well understood. Repeated research, like this study from 2015 and this one from 2017, has shown that most car buyers don’t understand how PCPs work and are often basing their assumptions on various myths and misconceptions.

Based on the thousands of questions about PCP finance from readers we have received here over the last few years, we have come up with our Top 10 PCP myths – and then busted them. Remember kids, never trust the smiling sales executive or your best friend’s neighbour’s uncle. Trust The Car Expert.

New car showroom - SEAT in Derby - offering PCP car finance

PCP Myth #1: You’re not really buying the car

There is still a misconception that PCP car finance is a lease or rental, rather than a purchase. This is simply not true, even if most buyers tend to treat it like a lease.

A PCP is a form of hire purchase (HP), so you are buying the car over time. It doesn’t officially become your property until the last penny is paid off, just like a classic hire purchase or the mortgage on your house, but you are making payments towards eventual ownership unless you choose not to make the final payment.

   

It is estimated that fewer than 20% of PCP customers will ever make that final payment, with the vast majority choosing to hand the car back or part-exchange it instead. But the default option in your contract is always to make the final payment, so it forces you to take action to stop that from happening.

For more information, check this out:
Personal Contract Purchase: the PCP explained

PCP Myth #2: You’ll have equity at the end of the agreement

PCP finance is usually sold on the vague verbal promise of equity at the end of the agreement. The idea is that your car will be worth more than the final balloon/guaranteed future value (GFV) amount, and the leftover is what you use as all or part of the deposit towards your next car.

For most car buyers, that certainly used to be the case. However, these days you will be lucky if your car is worth the balloon amount at the end of your agreement, meaning that you won’t have any equity and therefore you will have to come up your next deposit from your own savings.

For more information, check this out:
Collapsing car sales – is the industry in crisis?

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Stuart Masson
Stuart Massonhttps://www.thecarexpert.co.uk/
Stuart is the Editorial Director of our suite of sites: The Car Expert, The Van Expert and The Truck Expert. Originally from Australia, Stuart has had a passion for cars and the automotive industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.

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4 COMMENTS

  1. Im thinking of doing PCP on a car worth 36000, with the deposit at 8000 and 36 monthly repayments of 450. When that ends after 3 years and I decide to trade it in for a new one, Will I have to put 8k down as a deposit again to keep my payments at 450 a month?
    Thanks

    • Hi Rob. Assuming you don’t have any equity in the agreement, the same car price/spec/mileage/residual value and the same finance APR and term, then yes.

      In reality, your next car won’t be exactly the same and the finance agreement won’t be exactly the same. But in principle, yes.

      For more information, have a read of our guide to PCP car finance.

  2. Hi Stuart, thanks for the reply. I have heard they give you the absolute minimum of what they think the GMFV will be so chances are you will have equity to put towards the car for your next pcp deal , correct?

    • That certainly used to be the case, but not so much anymore. GFVs have been creeping up (being artificially propped up by manufacturer finance companies to help keep monthly payments down), while used car values have been coming down. The combined result of these two factors is that most customers are now finding they have little to no equity at the end of their PCP agreements, whereas previously they had a useful amount to put towards their next car. We explored this a few months ago in this article about falling new car sales.

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