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How to understand a PCP car finance quote

Don't let a car dealer rip you off with a costly PCP finance agreement. We explain exactly what to look out for so you can get the best deal.

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We get a lot of readers asking questions or looking for explanations about a personal contract purchase (PCP) quote they have received from a dealer or seen online. This is not surprising, as a PCP car finance quotation can look quite confusing.

In this article, we are going to go through a PCP car finance quote line by line, and explain what each item means. We will tell you what to look out for, and what you can do to adjust each number to suit your needs. If you can understand every aspect of the quote, you are much more likely to get yourself a deal that works for you rather than a deal that works for the car dealer.

When looking at a car finance quote, take your time and work through it line by line as we will do below. Refer back to this document as you are reading your quote to help you understand it. Don’t just accept whatever the car dealer tells you; you need to take responsibility for making sure the finance offer meets your needs.

Look beyond the monthly payment

Most buyers tend to focus on one line – the monthly payment figure. They will have a target of £X per month, and that’s all they are interested in. However, every aspect of a finance quotation is connected, so if you are trying to reduce a monthly payment quote to get it down to your target, that will inevitably mean you have to compromise somewhere else. Tweaking one line of the quote will always affect several other lines, and you may end up worse off as a result.

PCP car finance quotation salesman
Don’t be distracted by the shiny things; focus on your financial limits.

For this article, I have taken a genuine PCP car finance quotation from a large manufacturer finance company on one of the best-selling cars in the UK. However, everything you read below will apply to any PCP car finance quotation.

The reason we are using a PCP quotation is because it is by far the most popular type of car finance for retail car buyers in the UK. More than 80% of all private new car buyers will use a PCP to buy their vehicle, and a rapidly growing number of used car buyers as well.

If you want even more information about any of the technical jargon used in this article, check out our comprehensive car finance glossary that explains everything in plain English.

PCP car finance quote example*

Duration48 months
Monthly payment£275.42
Customer deposit£3,000.00
Deposit contribution£1,250.00
Retail cash price£23,900.00
Acceptance fee£0.00
Optional final payment£9,804.60
Option to purchase fee£10.00
Total amount payable£27,009.34
Total amount of credit£19,650.00
Representative APR %5.4% APR
Rate of interest5.34% fixed
Annual mileage allowance10,000
Excess mileage (per mile)6p

*example is an actual finance quotation taken for a popular new car in the UK, as advertised in June 2020

1. Duration

The duration is also called the term. In this case, the 48 months shown actually consists of 47 regular monthly payments plus one large final payment, also called the balloon or guaranteed (minimum) future value (GFV/GMFV).

A PCP car finance agreement can usually run for anywhere between 18 months and 48 months. A longer duration will usually mean lower monthly payments, but the overall amount you end up paying will be higher as you will pay more in interest since you are borrowing the money over a longer period.

Be very cautious of anyone trying to offer you a PCP longer than 48 months, as it rarely works out to your advantage.

If you want to make the duration shorter, you can:

  • increase your upfront deposit
  • increase your monthly payment
  • choose a cheaper car

2. Monthly payment

This is the number that most buyers are looking at – how much will this car cost per month? However, it’s only one part of the equation, and you have to make sure that every other aspect suits your needs.

The question of “How do I bring my monthly payments down?” is very common but there’s no magic here answer. Reducing the monthly payment will require you to accept a less-desirable change somewhere else, and concentrating only on the monthly payment can lead you into trouble.

If you want to bring this payment down, you can:

  • choose a cheaper car
  • increase your upfront deposit
  • reduce your annual mileage
  • take a longer term (max. is usually 48 months; see above)
  • negotiate a discount on the price of the car
  • negotiate a discount on the interest rate on the finance

3. Customer deposit

This is the amount you are paying the dealership up front, which is taken into account as part of your overall PCP car finance agreement. The word “deposit” can be confusing; you won’t get this money back again at the end of the agreement. The more money you put in at the start, the less you will have to pay per month. Conversely, the less you put in to start off, the more you will have to pay each month.

If you want to bring this payment down, you can:

  • choose a cheaper car
  • increase your monthly payment
  • reduce your annual mileage
  • take a longer term
  • negotiate a discount on the price of the car
  • negotiate a discount on the interest rate on the finance

Car dealers will often encourage you to put in less deposit and increase your monthly payment, and a common phrase they will use is that a large deposit is “dead money”. Don’t be fooled; they’re saying this because it suits them. They get commission on every pound that you borrow, so if you reduce your deposit by £1,000 you will be increasing your debt by £1,000 and they will get more commission. Do what is right for you.

Part-exchange vehicle
If you have a part-exchange vehicle, that can be used as a form of deposit. If the dealer values your car at £2,000 then that’s the same as a £2,000 cash deposit. If you have outstanding finance on your vehicle, it’s value will be the net result of its value minus the finance. So if your car is valued at £8,000 but you still owe £7,000 to the finance company, it’s only a £1,000 deposit.

If your car is valued at £8,000 but you still owe £9,000, that’s called negative equity and it means you have to pay £1,000 to get rid of your car before you can start thinking about additional deposit towards your new car.

4. Deposit contribution

A deposit contribution is basically a discount for taking the finance agreement; in the example above, it’s £1,250. Instead of taking £1,250 off the price of the car, the dealer is giving you £1,250 towards the price of the car. It’s kind of the same thing, but it can have advantages if you need to voluntarily terminate the agreement later on.

This amount is usually offered as part of a national campaign on a particular model, and is available from any dealership for that manufacturer. It’s a discount/offer, so it won’t be available on any model. It’s much less common to see a deposit contribution offered on a used car.

Dealers will often offer to use this deposit contribution to cover any negative equity you have in your current car (see above), so you don’t have to find the cash to settle the outstanding finance. This means that there will be little or no contribution left towards the new car, so you are making your new car more expensive by doing this.

Here at The Car Expert, we are building commercial partnerships with companies who can offer you competitive PCP deals on either a new or used car (as well as other types of finance if you prefer). Check these out before signing any finance agreement with a car dealer:

  • We Finance Any Car can arrange PCP or HP finance at competitive rates
  • Motorly can find you a great car finance deal, even if you have a poor credit rating
  • FairSquare can find and finance either a new or used car, and deliver it to your door

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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.