What is PCP finance?
Personal contract purchase, or PCP for short, is a flexible car financing option that can offer lower monthly payments than a personal loan or hire purchase (HP) car finance agreement. It’s basically a loan to help you buy the car you want. But it differs from a normal personal loan because you don’t have to pay off the full value of the car. It could be a good option for you if you like to change your car regularly.
PCP finance gives you the choice of owning the car at the end of the contract by paying the balloon amount or trading it in. PCP splits the price of the car into affordable chunks; a deposit, monthly payments, and an optional final payment. You also have until the contract ends to decide whether you want to buy the car or not.
But be aware, with PCP the loan is secured against the car. This means if you fail to keep up with the repayments, you could lose the vehicle.
How does PCP finance work?
PCP car finance is a little tricky to get your head around but it can be broken into three key parts that make it clearer:
This is usually for around 10% of the car’s price.
The amount you borrow
With PCP the amount you’ll borrow is decided by the finance company’s prediction of how much the value of the car will drop over the term of the deal (usually 24 or 36 months), they also subtract the deposit from this to give them the total amount you’ll owe. You’ll then make monthly payments including interest.
The balloon payment
Agreed at the start of your deal, this is how much the dealer thinks your car will be worth when your deal ends. It’s also often referred to as the Guaranteed Minimum Future Value (GMFV). You can either choose to pay it and keep the car, trade your car in for a replacement and start a new PCP contract, or give the car back and there won’t be anything to pay, providing you’ve honoured the terms of the agreement and the car isn’t damaged.
How to cut your monthly PCP car finance payments
There are a number of factors that affect how much you’ll pay each month.
Depreciation - You may find that a car you’d expect would cost you more, could actually work out cheaper than a less desirable car. That’s all down to how fast a car depreciates (drops) in value. To enjoy lower payments consider choosing a reasonably low-priced car that holds its value.
Deposit – The more you can manage to pay upfront, the less you’ll need to pay each month.
Contract length – If you spread the deal over a longer period, you’ll pay less each month. But bear in mind you’ll be paying more interest, which means you’ll pay more in total.
Mileage limit – You’ll need to agree an annual mileage limit at the start of your contract. The lower this is, the lower your monthly payments will be. Be realistic about the amount of mileage you’ll do though, as if you exceed the agreed mileage limit you’ll need to pay excess mileage charges.
APR (interest charges) - Looking for deals offering a lower APR charge will keep your monthly payments down.
What you need for PCP finance
You’ll need to present certain information, documents and proof of ID, so your application can be assessed.
If you haven’t got all the documents required, your finance application will be declined. Information you should expect to provide includes:
Your full name (any previous names if relevant), date of birth, marital status, residential status (whether you own your own home, are renting, living with your parents, etc) and your full address history for the last three years.
Employment details and history
The name and address (including postcodes) of all your employers for the last three years, at least. This needs to include your job title and salary. If you’re self-employed, you’ll be asked to provide your accounts as proof of income.
Your bank details for the account you’ll want your monthly payments taken from. Including your branch’s address, sort code and account number.
Identification documents needed for car finance
You’ll need to provide your driver’s license, proof of address (like a utility bill), and proof of income (payslips or bank statements).
How is PCP different to other types of car finance?
PCP differs to other finance options mainly because your monthly instalments are paying off the depreciation of the car rather than its full value. So, you’re repaying the difference between what your car is worth now and what it’ll be worth at the end of your contract (plus interest). It also gives you greater flexibility than other car finance deals. Once your agreement comes to an end you’ll have the three options previously mentioned:
- Pay the balloon payment and buy the car
- Give the car back
- Part exchange for a new car
Choose the car finance option that’s right for you
Of course, there are other ways to finance your car purchase that may suit you better than a PCP – you should explore all the options before you make a decision. Read our guide on the different types of car finance. You may also decide to opt for a personal loan or a credit card. Whatever way you choose to spread the cost of your new wheels, it’s a good idea to check your credit score and report. You’re more likely to get offered more favourable rates the better your score is, so it’s worth getting your credit score in shape before making any applications to try and secure the best deals. Read our guide to get tips on how to improve your score. And, once you’ve done your homework and you’re ready, you can search and apply for the right car finance for you, with our help.
Just remember, we're a credit broker, not a lender†. That means we don't provide credit, but we can help you find offers from a range of companies.Compare PCP loans with Experian