Personal contract purchase (PCP) loans

Cheap Personal Contract Purchase
How to find the best deal for you

If you need a new car but lack the funds to purchase it outright, car finance might be a viable solution to get you on the road. However, it’s a significant financial commitment. Here, we’ve outlined the essentials of Personal Contract Purchase (PCP) car finance to help you determine if it suits your needs.

IMPORTANT! Did you buy a car on Personal Contract Purchase or Hire Purchase before 28 January 2021?

If so, you could be due £1,000s back. This follows the launch of a Financial Conduct Authority investigation into hidden, unfair car finance commission. Take a look at our Free car finance reclaim guide and tool to find out more and see if you may be affected.

What is Personal Contract Purchase?

Personal Contract Purchase (PCP) is essentially a loan designed to facilitate car ownership. Unlike a standard personal loan, you won’t be repaying the full value of the car, and ownership isn’t transferred to you at the end of the agreement unless you make a substantial final payment.

Though it is one of the more intricate financial options for purchasing a car, it can be simplified into three primary components:

1. The Deposit: Typically around 10% of the car’s price. Some car manufacturers offer significant ‘deposit contributions’ ranging from £500 to £2,000 or more if you finance through them, particularly for new cars. A larger deposit reduces the amount you need to borrow.
2. The Amount You Borrow: You finance the car’s value minus the deposit. However, your repayments are structured not to cover this entire amount. Instead, you pay off the loan minus the ‘balloon payment’ (a significant sum due at the end of the term if you decide to keep the car).Your monthly payment is calculated based on this reduced amount divided over the term (typically 24 or 36 months), plus interest. Interest rates generally start around 4%, though some dealers might offer 0% interest. Be cautious with these deals as they might recoup their losses by inflating the balloon payment.

   You can secure financing through an online lender, broker, or a finance company affiliated with your dealership. Regardless of the source, the finance company pays the dealer the full price of the car (minus your deposit), and you make your payments to the finance company while it retains ownership of the car (you will be the registered keeper).

3. The Balloon Payment: Also known as the guaranteed future value (GFV) or optional final payment, this is the expected value of the car at the end of the finance term, predetermined at the start of your agreement.You have the option not to pay this sum. Instead, at the end of the term, the finance company will contact you to decide whether you will pay the balloon payment to keep the car, return the car, or trade it in if its value exceeds the agreed balloon payment, using the surplus as a deposit for a new deal.

How does PCP finance work?

Personal Contract Purchase (PCP) is a somewhat intricate car financing method, illustrated by the following example:

1. You decide to buy a car for £20,000 over three years, and the finance company estimates the car will be worth at least £8,000 at the end of this period.
2. You make a 10% deposit (£2,000) and take out a loan for the remaining £18,000.
3. Consequently, you owe £18,000. However, since the car is expected to be worth £8,000 at the end of the term, you only need to repay £10,000 (plus interest on the full £18,000) over the three years. This repayment is typically divided into monthly installments.
4. For instance, if your PCP agreement has an interest rate of 7% APR, your monthly repayments would be approximately £350, based on the borrowed amount and the loan duration.
5. At the end of the contract, you can pay the final £8,000 to keep the car, or you can return the car and possibly start a new PCP deal.

It’s important to note that even if you return the car, you will have paid interest on the total loan amount (£18,000) over the three-year period, and the finance company retains ownership of the car throughout the PCP agreement.

No-deposit deals might be available but are less common. Typically, car finance deals come with a fixed interest rate; however, focus on the annual percentage rate (APR), as it encompasses all interest and fees. By law, the APR must be disclosed, so look for it and inquire if it’s not readily visible.

Alternative types of car finance to consider

This guide focuses on Personal Contract Purchase (PCP), though before you go on, do check these alternative types of car finance to assess if they’d suit you better.

Broadly speaking, there are six different ways to pay for a car. The table has the key differences at a glance, before we run through the alternatives to PCP in more detail.

• Cash Savings – The Most Affordable Option for Most Cars

If you want to fully own your car from the start, cash savings is the best choice since you avoid paying interest or accruing debt. However, if you’re buying a brand new car—which typically depreciates by around 40% in the first year—and plan to change it within a few years, consider leasing or a Personal Contract Purchase (PCP) deal. These options can sometimes make overall ownership more cost-effective.

• 0% Spending Credit Card – No Interest if You Have a Sufficient Credit Limit (and the Dealer Accepts Cards)

For those who qualify, a 0% spending credit card can be an economical borrowing option, depending on the car’s price. You’ll own the car outright and benefit from Section 75 protection. However, not all dealers accept credit cards, so verify this beforehand.

Credit limits are usually unknown until after application, and you must plan to repay the debt before the 0% interest period expires to avoid high-interest charges. Cards typically offer up to 25 months at 0% interest. For more details, see our 0% spending cards guide, and check the Credit Cards and Loans section on our website.

• Personal Loan – Generally the Cheapest Option if You Need to Borrow and Want Full Ownership

Though not interest-free, a personal loan may allow you to borrow more money over a longer period than a credit card. Repayments are structured to clear the debt within one to five years.

With a personal loan, you’ll own the car outright. For the best options, refer to our Cheap Loans guide and use our personal loan calculator to determine potential borrowing amounts and interest costs.

• Hire Purchase (HP) – A Viable Option if You Can’t Secure a Cheaper Loan, Though the Lender Owns the Car Until Fully Paid

Similar to a loan, an HP agreement means you’re borrowing to pay off the car’s full cost, but you won’t own the car until the final payment is made. The finance company owns the car as it serves as collateral for the loan, and can repossess it if you default on payments.

HP deals may be easier to obtain than traditional loans, but usually require a deposit (often 10% or more of the car’s price). Consider how you’ll fund this deposit.

Dealers might offer larger discounts or deposit contributions on new cars to promote finance deals. For used cars, you might be able to negotiate some price reduction. Always calculate the total repayment amount, including interest, to understand the true cost. See our Cheap Hire Purchase guide for further assistance.

• Car Leasing/Personal Contract Hire (PCH) – Low Monthly Payments, but No Ownership Option

Leasing allows you to drive a new car for a monthly fee, essentially a long-term rental without ownership or purchase options. You pay an initial deposit followed by monthly payments over one to four years.

Similar to PCP, you select a mileage allowance (e.g., 8,000 miles annually) and are responsible for the car’s maintenance. At the end of the lease, you return the car, but may incur charges for excess mileage or damages. For comprehensive guidance, see our Cheap Car Leasing guide.

Personal Contract Purchase need-to-knows

1. The final balloon payment is determined by the car’s make/model, mileage, and the length of the agreement

Dealers estimate the balloon payment by projecting the car’s value after accounting for depreciation over the contract period.

Several factors influence this depreciation:

• Make and Model: Certain cars lose value faster than others.
• Contract Duration: A car is typically worth less after three years compared to two.
• Annual Mileage: For instance, a car with 40,000 miles after three years will be valued lower than one with 20,000 miles.

Car finance companies often utilize specialist car valuers such as Cap HPI, Parkers, and Glass’s Guide to predict the future value of a car by examining the historical depreciation of similar models.

This estimated future value is known as the ‘guaranteed minimum future value’ (GMFV), which forms the basis of the balloon payment.

Additionally, the finance company may apply its own risk assessment, leading to variations in balloon payments across different providers.

2. Despite not owning the car, you’re usually responsible for insurance, parking/speeding tickets, and general upkeep

During the PCP agreement, the finance company remains the legal owner, while you’re listed as the registered keeper. This makes you liable for parking and speeding tickets, servicing costs, and insurance. Therefore, these expenses should be considered in addition to your monthly payments.

Dealers may offer service and maintenance packages, warranties, and insurance. Ensure these are complimentary or provide good value. Refer to our Cheap car insurance guide for detailed advice on reducing insurance costs.

3. At the end of a PCP, you have three main options: buy the car, return it, or get another

When your PCP contract concludes, you generally have three choices:

1. Purchase the car by paying the balloon payment. This grants you full ownership. Note that most finance companies impose an additional fee for buying the car at the contract’s end to cover administrative costs, usually around £100, but it can go up to £500.
2. Trade in your car for a new PCP deal, which can be done in two ways:
   • With the same dealer/finance company: This is common for PCP deals. At the contract’s end, if the car’s value exceeds the balloon payment, you can use this ‘equity’ as a deposit for a new PCP deal. For example, if the car’s value is £9,000 and the balloon payment is £8,000, you have £1,000 for the next deal.
   • With a different dealer/finance company: If your PCP agreement is with a specific manufacturer (e.g., BMW Finance), you can usually only trade within that brand. Switching brands typically requires paying the balloon payment to own the car, after which you can trade it in with a new dealer.
3. Return the car and walk away. If the car is worth less than the balloon payment at the contract’s end, you can return it, and the finance company absorbs the loss.

If the car’s value exceeds the balloon payment, you cannot pocket the difference. You’d need to purchase the car and sell it privately or trade it in, or obtain permission from the finance company to sell it and then settle the finance.

4. Expect hefty fees at the end if the car is damaged or exceeds the mileage allowance

Whether you trade in or return the car, additional charges may apply. The finance provider usually inspects the car to determine any owed amounts:

• Over-mileage charges: When starting a PCP deal, you specify an annual mileage estimate to help the dealer assess the car’s future value. Exceeding this limit incurs charges, often around 10p per mile, which can quickly add up.
• Damage charges: Similar to renting a car, the finance company checks for damage upon return. Normal wear and tear is acceptable, but the car must be in sellable condition. Large scratches or damage may incur costs to restore the car’s condition.

To avoid these charges, set a realistic mileage limit and maintain the car well. Request the dealer or finance company’s fair wear and tear policy at the agreement’s start to anticipate potential fees. It might be more cost-effective to repair damages yourself at an approved service center.

5. Ending the agreement early is possible but can be expensive

To terminate the contract early, consider these options:

• Voluntary termination: Under the Consumer Credit Act 1974, you can terminate the contract if you’ve paid over 50% of the total loan cost, including interest and the balloon payment. Although car finance companies may discourage this, it remains a legal right. Note that voluntary termination will appear on your credit file but should have less impact than missed payments.
• Early repayment: The finance company only guarantees the car’s value at the contract’s end. Selling the car mid-term requires covering the difference between its current value and the remaining finance amount. For example, if your car is worth £15,000 but you owe £17,000, you’d need to pay £2,000 to clear the ‘negative equity’. Some providers may charge an early settlement fee; check the contract details.

6. You generally need to pass a credit check and risk losing the car if you miss payments

Applying for a PCP usually involves a credit check, which appears on your credit file. Credit checks for HP are less stringent than for personal loans since the car serves as security. Failure to make payments can lead to repossession of the car.

If you anticipate payment difficulties, contact the lender promptly to explore alternative repayment plans. Consistently missing payments results in a default mark on your credit file and potential repossession of the car, affecting your ability to secure future credit. See our Credit scores guide for more information.

Where can I get a PCP deal?

Here are two primary routes to consider. The most prevalent method is securing financing through the dealership from which you’re purchasing the car. However, it’s advisable to obtain quotes from online brokers beforehand to compare with the dealer’s offer. Bringing a copy of the lowest quote can also be beneficial, as you can request the dealer to match or beat it.

Important: Spending £100 to £30,000? Use a Credit Card for Purchase Protection

Making even a small payment towards your car with a credit card provides significant protection if issues arise later on. This is because transactions are covered under Section 75 laws.

If the car’s total price ranges between £100 and £30,000, paying any portion of it with a credit card ensures that the card company (or finance company, in some cases) shares liability with the dealer if something goes wrong.

However, this process can be complex. Some dealers do not accept credit cards, while others may only allow limited card payments. Consider how crucial this protection is for you and confirm with your dealer if they accept credit cards before finalizing your payment method.

Online Lenders & Brokers

Personal Contract Purchase (PCP) deals are available from various lenders and brokers, providing an overview of potential prices and repayments for your desired car. Brokers offer a wide array of PCP deals, including options for those with a poor credit history, as they partner with multiple lenders to provide financing.

Some brokers can also help you find a vehicle, in addition to arranging finance. However, you can still purchase your car from any dealer in the UK and use the broker solely for the loan. Once the finance agreement is signed, funds will be transferred to the dealer.

Dealer Finance

Often referred to as forecourt finance or simply car finance, this option is available at nearly every dealership in the UK, with PCP being one of the popular choices. Dealerships generally fall into three categories: franchised (affiliated with specific manufacturers like BMW), independent (not affiliated with any particular brand), and car supermarkets. Websites such as Car Wow and Drive the Deal are valuable resources, enabling you to compare offers from dealers nationwide. This allows you to potentially find significantly cheaper deals from dealers located far away, which you might have otherwise overlooked.

• Getting a PCP Deal Through the Manufacturer’s Finance Arm

At franchised dealerships, financing is typically handled through the manufacturer’s own finance division, such as Ford Credit or Volvo Financial Services. It’s worthwhile to explore the finance deals available at these dealerships, especially when purchasing a new car.

Manufacturers often provide a deposit contribution ranging from £500 to £2,000 and may offer 0% finance. If you don’t qualify for 0% finance, the standard advertised APR usually starts around 4%. However, this rate is representative, and those with poorer credit histories might be offered a higher rate.

It’s important to note that if you plan to own the car at the end of the agreement, PCP provides low monthly payments. But when factoring in the final balloon payment, PCP often ends up being more expensive than a personal car loan or Hire Purchase.

• Getting PCP Finance Through an Independent Dealership or Car Supermarket

Independent dealerships and car supermarkets often source their financing from the consumer arms of major banks, enabling them to offer a variety of deals similar to those at franchised dealerships. Providers like Black Horse (part of Lloyds) and Santander Consumer Finance supply financing to non-franchised dealerships.

These finance providers are not affiliated with manufacturers and typically cannot offer the substantial incentives like 0% finance or deposit contributions that manufacturers’ finance arms can. At these dealerships, you can expect a representative APR between 5% and 10%, or higher if you have a poor credit history.

The finance market is highly competitive. It’s essential to review what’s available online and from various dealers and carefully consider what you can afford. Ensuring you can manage the repayments before committing is crucial. With all types of finance, if your application is approved, the funds are sent directly to the dealer.

What details and documents do I need to provide when applying for PCP finance?

Although specific requirements can differ among lenders, here are some details and documents you will likely need to provide when applying for PCP finance:

• Personal Information: This includes your full name, date of birth, and contact details, such as your phone number and email address.
• Employment and Income Details: For example, your employer’s name and contact information, along with recent payslips or proof of income (like bank statements or tax returns if you’re self-employed).
• Address Details: Typically, this involves information on how long you have lived at your current address, as well as details of any previous addresses if you have moved recently.
• Financial Information: This might include details of existing financial commitments (like credit cards and mortgages), bank statements showing your income and expenditures, and information about any other assets or liabilities. Most lenders will also require a credit check. For more information on this and how to check your score for free, refer to MSE’s guide on checking your credit report.
• Vehicle Information: This includes the make, model, and registration number of the car you are interested in, the purchase price (including any optional extras), and details of any deposit you plan to make.
• ID Documents: Proof of identity (such as a passport) and proof of address (such as utility bills or a council tax statement) will be needed.
• Driving Licence: A copy of your driving licence is required. Make sure it is still valid by checking our Driving Licence Renewal guide.
• Bank Details: These are needed to set up the Direct Debit for your monthly repayments.
• Insurance Details: Some lenders may ask for proof of car insurance cover. For tips on getting affordable insurance, check our comprehensive guide.

Always confirm with the specific finance provider for their exact requirements, as they may have additional criteria or request different documentation.

What to do if you’re struggling with your PCP payments

If you find yourself having trouble with your PCP repayments, here are some options to consider:

• Reach Out Early to Your Lender: Contact your finance provider as soon as you realize you may have difficulty making payments. The sooner you do this, the more options they can offer to help you get back on track financially. Be honest about your circumstances so the lender can fully understand your situation.
• Explore Options with Your Provider: Some lenders might be willing to modify your PCP agreement. This could involve extending the loan term, adjusting monthly payments, or deferring payments temporarily (known as a payment holiday). Keep in mind that these changes may increase the overall cost of your loan and impact your credit score, but they are generally better than defaulting on your agreement.
• Consider Returning the Car: If you’re really struggling, you might consider returning the car before the term ends. However, if you’ve paid less than 50% of the total cost, it might be beneficial to keep the car if you can. To terminate the deal early, you need to have paid at least half of the agreed installments, so holding onto the car until then could be advantageous.
• Part Exchange the Vehicle: Another option is to trade in your car for a more affordable model to reduce your monthly payments. Be aware that you will need to pay an early settlement figure and potentially additional costs to clear the existing borrowing. If the car’s value is less than these costs, the trade might not be worthwhile.
• Review Your Insurance: Check your insurance policies, particularly if they include payment protection or gap insurance, as these might assist in specific situations, such as if the car is written off. More information about gap insurance can be found in our FAQ section.
• Seek Free Debt Help: If your financial problems extend beyond your PCP contract, seek additional support. You can create a budget, claim any benefits you are entitled to, and reduce the cost of your debt. For more details and access to free financial support, refer to our comprehensive Debt Help guide.
• Understand Repossession Procedures: A lender can only repossess your car without a court order if you’ve paid less than a third of the agreement. It’s wise to be familiar with the terms and conditions of your PCP agreement regarding repossession. Knowing the lender’s policies can help you manage the situation if it comes to this.

Remember, communication is crucial. Keeping your lender informed and working together to find a solution is the best strategy. Ignoring the issue can lead to bigger problems, so it’s important to tackle financial challenges directly.

Want to complain about your car finance provider?

If you believe your car finance agreement was mis-sold, refer to our specialized guide on reclaiming car finance.

Additionally, you can file a complaint if your car finance provider has charged the incorrect amount, treated you unfairly, or provided poor service. It’s advisable to first contact the lender to see if they can resolve the issue, but if that doesn’t work…

You can utilize the free complaints tool Resolver. This tool assists in managing your complaint and, if the company is uncooperative, helps you escalate the issue to the free Financial Ombudsman Service.

Personal Contract Purchase FAQs

Q: Is PCP financing limited to new cars only?

A: No, you can typically finance a car that’s a few years old using PCP. However, interest rates may not be as favorable in these cases. This is because used cars have already depreciated significantly, leaving dealers with less potential resale value.

Consequently, the interest charged becomes the primary source of profit for dealers in PCP deals involving used cars.

Q: How can I minimize my repayment amounts?

A: Avoid stretching your budget; opt for a less expensive car if the repayments seem too high. Alternatively, consider making a larger initial deposit and extending the repayment period.

Remember, you’re financing the car’s depreciation, so selecting a model with strong resale value presents another avenue for savings. Additionally, carefully consider your annual mileage—lower mileage settings result in lower repayments (but ensure it’s realistic to avoid steep over-mileage penalties).

Q – Why do dealers offer PCP deals?

A – They’re a lucrative business, offering a popular avenue for purchasing new cars. The lure lies in the final balloon payment, which often steers customers towards leasing another vehicle rather than making a substantial cash outlay to own one outright. This cycle potentially spans decades, with customers returning to the same dealer, swapping cars, and accruing interest each time.

While buyers aren’t obligated to stick with the same dealer, many do, especially if they prefer a specific car brand. Dealers benefit from the assurance of receiving cars back in marketable condition, or else facing hefty penalties. This arrangement proves mutually beneficial, with lower monthly payments widening the accessibility of cars to a broader customer base.

Q: I’ve come across gap insurance, which supposedly protects me in case my car gets written off. Is it something I should consider?

A: When your car is declared a total loss due to an accident or theft, your insurance company will reimburse you based on its current market value. This amount may be significantly less than what you originally paid, especially if the vehicle was new.

Gap insurance is designed to bridge this ‘gap’ between the payout from your insurer and the amount needed to purchase a replacement vehicle of similar make and model.

However, it’s not mandatory. Currently, the Financial Conduct Authority (FCA), the insurance regulator, is investigating gap insurance providers amid concerns that their policies might not offer equitable value to all consumers. In fact, the FCA has requested insurers to cease selling these policies by March 2024.

While we do have a guide on gap insurance, we’ve opted to withhold promoting these products until the FCA completes its investigation. We’ll update our information accordingly once more details are available.