PCPs explained

A company car is a great perk to have but does it always offer the best value for money?

If you have opted to go for the cash allowance instead of the car, you may be looking to buy a new car through a Personal Contract Purchase (PCP) deal.  

There are a number of benefits to this decision, one of the biggest will be the potential to take ownership of the car after the term, another is to reduce your monthly company car tax bills.

Your company may restrict company car choice, whether that be by CO2 emissions, price or manufacturer, so choosing to opt for a PCP deal may mean you get the car that you want too.

Although there are many benefits to PCP, it is worth bearing in mind that once you have started your contract it is legally binding unlike a company car scheme which can be left if you move jobs.

To find out more about whether cash or a company car is best suited to you, read our Cash vs Company Car guide here.

Choices, choices, choices

A PCP is an arrangement where, once you have agreed a purchase price for your new car with the dealer, the finance company buys the vehicle on your behalf and you effectively rent it for the duration of the term.

You’ll probably pay on a monthly basis for an agreed period (most PCPs last between 18 to 42 months) where at the end you’ll have to pay what is known as a ‘balloon payment’ in order to secure full ownership of the car.

Most PCPs will give you an option at the end of the term: you can hand the car back, part exchange the car for another car on a similar deal, or make the final payment.

Go the distance
Some PCPs have mileage limitations and stipulations about the condition of the car at the end of the agreement. If the car is worth less than your designated ‘bubble’ amount at the end of the agreed period, you won’t have any extra money to put towards another car.

This doesn’t matter if you’re just walking away and handing back the keys, but if you were intending on buying another new model then requesting a high ‘bubble’ may mean you have no deposit for your next car.

You have to consider the mileage restrictions and don’t underestimate because it could prove costly. Make sure that the annual mileage restrictions are realistic because if you do go over you’ll pay extra. Even if the penalty is just 2p a mile, that’s an extra couple of hundred pounds if you have covered an extra 10,000 miles.

You can also have the servicing bills included as part of the deal, which makes life simpler. This is usually very attractive to former company car drivers who want to cut down the hassle of owning their own car.

You may also be charged if you don’t keep the car in good condition. Remember, even if you hand the car back, the supplier will still have to sell it on.

PCP versus HP
It is not difficult to confuse a PCP with a hire purchase scheme where you make a series of equal monthly payments until the term is finished. This arrangement means higher monthly payments but you don’t have to pay the balloon payment at the end.

Because you are deferring the payment at the end of the PCP, hire purchase schemes tend to be cheaper in terms of the amount of interest paid but PCP providers are more likely to have negotiated decent deals with their suppliers and you could well get a better discount on the car you are buying. It is a balancing act and make sure that you work out the total amount you’ll pay, and not just the interest rate, if you are torn between the two arrangements.

This is not a PCH
An easy mistake to make is to confuse a PCP with Personal Contract Hire (PCH) plans that are only available for businesses. The PCH is scheme where you just lease the car and there’s no prospect of ownership.

Parker’s Top Tip

You can research the cars you are interested in by reading the full Parkers car review. You can also work out exactly how much you’ll pay on company car tax using our company car tax calculator.

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