What is PCP Car Finance?

All You Need to Know About Personal Contract Purchase

Drive away your dream car with PCP Finance!

What is PCP?

If you’re considering buying a car, you might want to check out Personal Contract Purchase, or PCP car finance, as it could be your perfect solution. PCP is a popular car finance option in the UK that allows you to spread the cost of a new or used car over a fixed term, typically 24-48 months, with smaller monthly payments compared to a Hire Purchase or Personal Loan deal. 

PCP also gives you options at the end of the deal, such as paying to keep the car (a large balloon payment), handing it back, or trading it in for a newer model. It is important to remember that with PCP, the car you’re buying is used as security for the loan. If you miss payments, the lender can repossess the car.

How Does PCP Car Finance Work?

A PCP deal is a flexible way to get your desired car with lower monthly payments. It works like a long-term lease with an option to buy at the end:

• Deposit: You pay an initial deposit towards the car’s value, typically 10% to 30%. A larger deposit reduces your monthly payments.

• Monthly Payments:You make fixed monthly payments over the agreed term, usually 24-48 months. These payments cover the depreciation of the vehicle during your lease period. 

• Your Options at the End: The Guaranteed Minimum Future Value (GMFV) is the car’s estimated value at the end of the PCP agreement, set by the finance company. At the end of the deal, you have three options:

• • Pay the GMFV or Balloon Payment:If you love your car and want to keep it, you can pay the GMFV, typically a lump sum, and become the car’s legal owner.
  • Return the Car:Hand the car back to the finance company with no further obligation, provided it’s in good condition.
  • Refinance the GMFV:In some PCP deals, you might be able to refinance the GMFV into a new PCP agreement on a different car.

Our Ninjas have created a complete guide to car finance to help answer all your questions about car finance, including PCP.

Monthly Repayments – How are they Calculated?

A number of factors contribute to your monthly repayments, first and foremost being the type of car you are financing and its value. The newer/more expensive the car is, the higher the repayments will be. But there are other factors as well:

• Your Deposit: The more you pay upfront, the lower your monthly cost.
• Contract Length: If you spread the deal over a longer period, you will not need to pay as much each month.
• Depreciation: A newer car will depreciate much faster than a slightly older model that will hold its value longer. 
• Mileage Limit: You will need to agree to a mileage limit at the start of the deal. The lower the limit, the lower your repayments will be. 
• APR (Interest Charges): Looking for deals with a lower APR percentage will ensure that you are cheaper as well. 

Considering PCP for Different Types of Vehicles

SUVs: PCP finance is a popular choice for SUVs due to their typically higher price tags. The lower monthly payments allow you to drive a spacious, versatile SUV without breaking the bank.

Electric Cars:  As electric cars become more popular, PCP can be a great way to manage the initial cost. While electric cars generally hold their value well, the GMFV at the end of the PCP term can indicate any potential depreciation, helping you decide if purchasing the vehicle outright makes financial sense.

Commercial Vehicles:  PCP can benefit businesses looking to manage their cash flow. The lower monthly payments allow companies to acquire essential commercial vehicles without a significant upfront investment. It’s important to note that tax implications for commercial vehicle PCP may differ from those for personal vehicles. Consulting with a financial advisor is recommended.

What are the Benefits and Drawbacks of PCP Finance?

As with any large loan, there is plenty to consider before putting pen to paper:

Benefits of PCP:

• Lower Monthly Payments: Compared to other types of car loans, PCP offers lower monthly payments.
• Flexibility at the End of the Term: The end-of-term options in PCP provide flexibility. You can choose to own the car, return it, or potentially move on to a new model.
• Potentially Drive a New Car More Often: PCP allows you to upgrade to a newer car every few years by simply returning the current one and entering a new PCP agreement.

Drawbacks of PCP:

• May be Subject to Mileage Restrictions: Some PCP agreements have mileage limitations. Exceeding these limits may incur additional charges at the end of the term.
• Early Termination: PCP agreements may have penalties for early termination. Understanding these terms before signing is vital.
• Likelihood of Acceptance: PCP deals tend to have lower interest rates than other forms of car finance. If your credit score isn’t where you’d like it to be, you may have more success getting accepted with a Hire Purchase deal. 

Final Considerations

PCP offers a compelling way to finance your new car, SUV, electric vehicle, or commercial vehicle. With its flexibility and lower monthly payments, PCP makes owning your dream car a reality. But it is essential to consider the future and your requirements. 

If you are looking to keep this vehicle after the deal has ended, you will need to have the lump sum to pay the balloon payment to keep it. If you drive a lot of miles, this will also need to be factored in, as there will be mileage restrictions. 

The GMFV is an estimate, and the car’s actual value at the end might be higher or lower. Unless you exercise the purchase option at the end, you won’t own the car with PCP.

If a PCP deal sounds right up your street, why not calculate your PCP finance payment with our no-obligation PCP calculator? We also have a great selection of car finance guides that will help you better understand the different types of car finance and how each could help you. 

Our team of experts are on hand seven days a week to help you with any questions, so why not come to the car finance ninjas and see how we can help you slice the price of car finance?