Car finance explained: what is PCP?

  • PCP splits a car’s list price into a deposit, monthly payments and an optional final payment
  • Pay a large deposit to cut monthly costs or put down less and pay more each month
  • Choose whether to hand the car back or buy it outright at the end of the term
  • PCP splits a car’s list price into a deposit, monthly payments and an optional final payment
  • Pay a large deposit to cut monthly costs or put down less and pay more each month
  • Choose whether to hand the car back or buy it outright at the end of the term

Car finance comes in many shapes and sizes including Personal Contract Hire/leasing and Hire Purchase, but PCP – Personal Contract Purchase – is one of the most popular formats. Not only can PCP slice the cost of a new car into manageable chunks, but it also gives you the flexibility to choose whether to buy the car at the end of the finance term or simply hand it back.

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How does PCP car finance work?

PCP works by spreading the price of a car across a deposit, monthly payments and an optional final payment – making running a new car much more affordable for many drivers.

Car finance

Pay the final payment and you can take ownership of the car. Choose not to pay this and you can hand the keys back to the manufacturer with nothing else to pay – provided the car is in good condition, below the agreed mileage limit and has been serviced to the manufacturer’s specifications.

Alternatively, you can buy the car and then use it as a deposit to secure a new model. Should the car be worth more than the manufacturer’s Guaranteed Minimum Future Value (GMFV) from which the monthly payments are calculated, this could even give you a little extra money in your pocket.

Make sure you understand what type of finance you’re getting

Car manufacturers often give PCP schemes their own name – from Solutions and Dimensions to i-Deal and Aspirations – but the principle of these is the same. Pay a larger deposit and you have less to pay over the term – typically 24 to 48 months – or you can pay nothing upfront and pay a larger amount each month.

Car finance options

PCP schemes leave the choice whether to buy the car up to you at the end of the scheme – giving you plenty of time to decide whether you want to keep the car or get something else – but be aware that you don’t own the vehicle until you’ve made the final payment. 

Other factors affecting the monthly price include the mileage limit you choose and the finance period – with higher mileages bumping up the monthly cost and longer repayment periods cutting the monthly bill.

Should you exceed the agreed mileage limit, you may be charged excess mileage fees, which can be as high as 30p per mile or more. Similarly, you are likely to be charged for any damage to the car beyond normal wear and tear when you return it.

Choose to buy a car or hand it back

Setting PCP apart from the two other main finance formats is the choice to keep the car or hand it back at the end of the scheme. Due to the popularity of PCP schemes, there are also a number of discounts and offers available, including large deposit contributions, meaning that this is often the finance option that provides the greatest value and flexibility.

PCP

In contrast hire purchase schemes involve higher monthly bills as the cost of the PCP optional final payment is included in the price and drivers own the vehicle outright at the end of the term. PCH – personal contract hire – meanwhile, doesn’t offer you the chance to buy the car, simply letting you rent it over the finance term.

Want to find out more about PCP? Take a look at the articles below:

Work out which finance type is best for you

Lease a brand new car for less than Sky TV

What happens at the end of a PCP scheme?

Top PCP deals for £150 per month

The seven deadly sins of car finance

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