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Car finance advice

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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10. Total amount of credit

This is the amount of money you are borrowing, and is equal to the price of the car (£23,900) minus your deposit (£3,000.00) and the deposit contribution (£1,250).

It’s a common misconception that you’re not borrowing the balloon amount – not true at all. You are borrowing that £9,804.60 and paying interest on it, but you are not repaying it unless you decide to make the final payment at the end of the agreement.

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

  • choose a cheaper car
  • increase your up-front deposit
  • negotiate a discount on the price of the car
  • negotiate a discount on the interest rate on the finance
  • find a finance agreement with a lower APR

11. Representative APR

APR stands for Annual Percentage Rate, and includes all the interest and fees you have to pay on the finance agreement. It is essentially the cost of taking out finance, and obviously a lower number is better than a higher number.

If you are looking at a finance quote that has been prepared specifically for you rather than an advertised example, it may simply say “APR” rather than “Representative APR”.

A Representative APR is the rate that at least 51% of applicants must be offered, but you may not be offered this rate. The Representative APR in this example is 5.4%, but you may only be offered a higher rate (say, 7.5%)  if the finance company thinks you are a higher-risk customer.

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

12. Rate of interest

APR includes both interest AND fees; this bit is the interest component. In this example, the interest rate is 5.34% but the APR is only 5.4%, which means that there are very few fees that only make up 0.06% of your cost of borrowing.

This can be important because interest and fees are different. Interest is spread across your monthly payments, whereas a fee is charged in one hit. For any given APR, it’s usually better to be paying more in interest and less in fees.

Negotiate a better rate
If you are buying a car as part of an advertised campaign offer, there may not be any additional room for negotiation on the interest rate. However, in any other case (and especially on a used car), there is normally an opportunity to negotiate a percentage point or two off the interest rate.

If you can save 1% on your interest rate, that might be a much better result than haggling over a few hundred pounds off the price of the car.

13. Annual mileage allowance

For too long, this number has been buried in the fine print. It should be up there with all the other information, like it is in our example above – especially if you are looking at a specific finance quote prepared for you rather than an advertised example.

This number should reflect the number of miles you expect to do each year – the national average is about 10,000, which is what the example above shows. However, many dealers and finance companies are now quoting customers on much lower mileage figures (often 6,000 per year) unless you specifically nominate a higher mileage.

Why do they do this? Well, a lower annual mileage will make your final payment higher, which will reduce your monthly payments and/or your up-front deposit. The problem is that if you go over your mileage allowance, the finance company will charge you an excess mileage penalty (see below).

Make sure your mileage allowance reflects your driving requirements, and be realistic about it rather than optimistic.

14. Excess mileage

This is what the finance company will charge you for every mile you go over your allowance for the term of the agreement. It only applies if you are giving the car back to the finance company at the end of the agreement and claiming the guaranteed future value. For more information, have a read of our article about your options at the end of your PCP agreement.

This example is a 48-month (four-year) PCP with an annual mileage allowance of 10,000 miles, which means the total mileage allowance over the entire agreement would be 40,000 miles.

The excess mileage penalty fee in this example is 6p per mile, which works out to £60 for every 1,000 miles that you exceed your allowance. That’s actually quite low, but will still be more than you’d pay if you set the mileage correctly in the first place.

Summary

Ultimately, there’s no such thing as a perfect finance quote. As you can see above, a number of the variables above can be adjusted to suit your particular needs.

For example, if you increase your deposit then you pay less per month. That might suit you but may not suit another buyer, who may not have the cash available and would therefore prefer to pay a bit more per month in order to pay less up front.

Likewise, one buyer may prefer to wear a higher monthly payment in order to have a three-year PCP, while another buyer may prefer a lower payment over four years.

You need to work out what suits your financial circumstances, and don’t be charmed or bullied by a dealer who wants you to borrow more money or put in less deposit – they are doing this because it suits them, not because they’re trying to help you.

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
customer signing PCP car finance contract
Have you followed The Car Expert’s advice? Good, you can sign that contract now.

This post was originally published in June 2018. Last updated June 2020.

Disclaimer
PCP 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.

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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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