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PCP – Personal Contract Purchase Explained

PCP car finance packages are hugely popular to finance a car. They’re flexible, quick to arrange and relatively cheap… You’re pretty much guaranteed a good deal on a huge choice of makes and models.

To help you decide if a PCP deal is the right one for you, we’ve explained all you need to know… So without further ado, here’s our guide to how it works.

PCP car finance deals – short for Personal Contract Purchase or Personal Contract Plan – have surged in popularity over the last few years. These packages are widely available from both big-name manufacturers, franchises and independent dealerships (yes, including us!). They’re fairly straightforward to understand, plus cheaper than other options – which is probably why so many of us are choosing them. 

How does it work?

When buying a car on a PCP finance plan, you’ll pay a deposit and monthly instalments, just like you would with a loan. The great thing about PCP is that these amounts are often much smaller than with other methods of finance. But why?

The reason for this is that at the end of the term (the length of the agreement), PCP deals actually require a final sum or 'balloon payment' to be paid. Only after this payment does the car then become yours. 

What happens if I want to change the car?

PCP deals are probably so popular because they happen to be so flexible – you don’t always have to pay the balloon payment at the end of the deal at all.

Once you've reached the end of the term and you’ve completed all the monthly payments, you'll generally have paid off around a third of the cost of the car. At this point, you have three options. The first is to hand over the final payment and take ownership of the vehicle, and the second is to simply hand the car back and walk away. The third? You get to trade the car in and start a new deal on a complete different car.

Personal contract purchase is actually a lot like leasing a car, but with the option to own at the end - and it's this option that has been going down well with car-buyers for a number of years now. 

So what about depreciation? How does this affect a PCP deal?

In a way, you’re pretty much covered from costly depreciation with something called the ‘Guaranteed Minimum Future Value’ (GMFV). What’s that? Well, when you initially set up your PCP deal, you’ll be given a GMFV for the car. This is the minimum amount the car will be worth at the end of the agreement – meaning that should the car unexpectedly drop in value during the term, you'll be protected and always receive that price.

The GMFV is beneficial because it actually works both ways. That’s right, if the car happens to be worth more than when you bought it (and yes, it does happen!) you can use the equity as a deposit in your next PCP deal. 

Is PCP car finance right for me?

If you're looking to save a penny or two, it's a great option. When it comes to PCP deals, interest rates are usually very low - so you can often bag yourself a bargain.

However, it’s important to remember that there are often set mileage limits – you’ll need to give an estimate of your annual mileage when you take out the deal, as this will affect the GMFV. There is usually an excess mileage charge applied if you exceed these limits, so it’s worth doing your calculations correctly and giving an accurate number.

On a PCP deal, you also need to maintain the car in accordance with the manufacturer’s service schedule and look after it well – it’s got to be in good nick when you give it back. If you think you’re likely to want to take ownership of the car at the end of the term, PCP might prove a little more expensive than a hire purchase finance deals.

But, if you want to hand the car back or trade in for an all new model, as most PCP customers do, it's a fantastic low-cost option. And, you’ll get a shiny new (used) car at the end of it! If you roughly know your annual mileage (no, surprise roadtrips to Timbuktu!), plan to look after your car and will probably want a new one at the end of the term, then PCP is perfect for you.  


If you’d like to find out more about PCP car finance, or speak to one of our specialist finance team, give us a call on 0161 825 8467.