PCP car finance: what is it?

  • PCP splits price of car into affordable chunks
  • Deposit, monthly payments and final payment
  • Return the car, buy it outright or trade it in

Want to split a car's cost into monthly payments? Want to decide whether to buy outright or not further down the road? You need PCP finance.

It's the most widely used type of finance for new cars - customers love the simplicity and options it provides them.

What is PCP finance?

PCP stands for Personal Contract Purchase. It works by spreading the price of a car across a deposit, a series of monthly payments, and an optional final payment. Typically a PCP finance agreement lasts between two and four years.

Unlike with a bank loan – where you pay for the whole cost of the car over the contract – with PCP you just pay for the depreciation; that’s the difference between the initial price and what the car is expected to be worth when you hand it back.

This means that you can run a brand new car for an affordable monthly payment with the option to simply hand the keys back with nothing left to pay at the end of the contract – provided the car is in good condition, below the agreed mileage limit and has been serviced as stipulated by the manufacturer.

If you want to buy the car outright, however, you can simply make the optional final payment. And then it’s yours. Alternatively, you can trade the car in for a new one, taking advantage of any equity – should the car be worth more than the optional final payment needed to buy it – as part of the deposit on a new model. Remember, though, that you don’t own the vehicle unless you make that optional final payment.

Don’t think this ties you to one dealer or manufacturer, though. If you’ve found a great finance offer at another dealer they can always pay the optional final payment to buy your car from the finance company, treating it like a part exchange – and you can still benefit from any equity.

PCP deals

Choose to buy a car or hand it back

Setting PCP apart from PCH (Personal Contract Hire, often referred to as leasing) and Hire Purchase is the choice to keep the car or hand it back at the end of the deal – meaning you have more flexibility if your circumstances change.

There are also a number of discounts and offers available, including large deposit contributions – where the manufacturer or dealer adds to the deposit, shrinking your monthly payments – meaning that this is often the finance option that provides the greatest value.

In contrast Hire Purchase schemes feature higher monthly bills than PCP – as the cost of the optional final payment is included in the monthly payments – and drivers own the vehicle outright at the end of the term.

Leasing meanwhile, doesn’t offer you the chance to buy the car, simply letting you rent it over the finance term. Remember though that there’s no chance to buy the car when the contract ends or to hand it back early.

Be sure the type of finance scheme you’re signing up for

Car manufacturers often give finance schemes their own name – from Solutions and Dimensions to i-Deal and Aspirations. Therefore, it can be confusing distinguishing between PCP, PCH, Hire Purchase and other types of plan at the dealership.

Car dealership

If you’re worried that your situation might change and you could need to return the car ahead of time look at our guide to how to end a PCP scheme early and read our story on your options at the end of a PCP deal.

PCP car finance: how to cut your monthly payments

The amount you pay each month on a PCP deal is affected by a number of factors – and it’s not always a case of a higher list price meaning higher finance payments.

The higher the list price and the faster a car depreciates – that is, how quickly it drops in value – the greater your monthly payments will be. To ensure low payments look for cars that have a reasonably low list price and are still desirable at the end of the contract – meaning they should still be valuable at this stage – with a high optional final payment (also known as the balloon payment).

Deposit/deposit contribution
The more you put down, the less you’ll pay each month. Deposit contributions are available on many new car PCP schemes – this is a discount funded by the manufacturer and/or dealer. The greater the deposit contribution, the lower your monthly payments.

Contract length
The longer the contract, the less you’ll pay each month. However, you’ll also end up paying more interest, meaning you’ll face a higher bill overall – whether you’re handing the car back – or plan to buy it when the contract comes to an end.

Mileage limit
All PCP schemes feature a mileage limit. The lower this is, the lower your monthly payments.

Remember though – if you plan to hand the car back – that if you have exceeded the agreed mileage limit, the finance company can chase you for excess mileage charges. These could be as much as 30p per mile so be careful; chalk up 1,000 miles too many each year on a three-year contract and that could leave you with a bill for £900.

Meanwhile, if you plan to buy the car, a lower annual mileage cap also increases the optional final payment – which could be up to half of the car’s list price, if not more in some cases – so it’s worth working out how you can pay this if you can’t be sure you’ll have enough cash to hand.

APR/interest charges
The lower the APR rate, the lower your monthly payments. APR varies from 0% to around 7.9% for new cars, meaning that the difference between a good finance deal and a bad one could add thousands to the amount you pay overall.

Go for an interest-free credit deal with a deposit contribution and you’ll pay less than the list price overall to buy a car. But if you’re stuck with a 6.9% plan with no contribution you could end up paying more than a 20% premium over the list price in interest and other charges alone.

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