WHAT IS PCP FINANACE?
PCP, or personal contract purchase, is a flexible way to get a car without having to pay the full amount upfront. It works like a loan, but with lower monthly payments compared to hire purchase (HP) or personal loans, making it a more budget-friendly choice, especially if you like to switch cars every few years.
Here’s how it works: you usually start with a deposit, then make monthly payments over a set period—typically between 24 to 48 months in the UK, though some deals can be longer. The size of your monthly payments will depend on how much you put down initially and the length of the agreement.
At the end of your PCP deal, you have three options: return the car, trade it in for a new one, or pay the remaining amount to own it outright.
How Does PCP Finance Work?
Here’s a simple, everyday explanation of how PCP (Personal Contract Purchase) works:
- Credit Check
First, you’ll go through a credit check. Don’t worry, it’s usually not as strict as a personal loan because the car acts as security. If you miss payments, the lender can take the car back, so they take on less risk. - Pay a Deposit
Some lenders might ask for a deposit, usually around 10%. The more you put down, the less you’ll need to borrow. You can use an online PCP calculator to figure out how much you can afford, but always make sure it’s within your budget. - Make Monthly Payments
Once you’ve sorted everything, you’ll start making monthly payments. At the end of the contract, you have three options:- Give the car back and walk away
- Trade it in for a new PCP deal on a different car
- Keep the car by paying a balloon payment, which is the final amount that reflects the car’s value at the end of the term.
The balloon payment is agreed upon upfront, so you’ll know from the start how much it’ll cost to own the car if that’s what you decide.
How is PCP Car Finance Calculated?
PCP car finance is pretty straightforward once you understand how it works. When you sign up, the finance company will predict how much your car will be worth at the end of your contract. They look at things like how many miles you plan to drive each year and the car’s age.
This estimate is called the Guaranteed Minimum Future Value (GMFV) or Residual Value (RV), and it helps determine how much you’ll pay over the contract.
Basically, your monthly payments cover the difference between the car’s price now and what it’s expected to be worth (the GMFV/RV) at the end. This total amount is spread out into your monthly installments.
The interest rate you get depends on things like your credit history and how much deposit you put down.
How to Lower Your Monthly PCP Car Payments
If you’re looking to cut down on your monthly PCP payments, here are a few things that can help:
- Depreciation: Sometimes a car you think would cost more might actually be cheaper because it holds its value better. The slower a car loses its value, the lower your payments can be. So, choosing a car that doesn’t depreciate quickly can save you money.
- Deposit: The more you can pay upfront, the lower your monthly payments will be. A bigger deposit means borrowing less, which is always a win!
- Contract Length: Stretching your contract over a longer period can reduce your monthly payments, but remember, the longer you take, the more interest you’ll end up paying in the long run.
- Mileage Limit: You’ll agree on a yearly mileage limit when you sign up. The lower your limit, the less you’ll pay each month. Just be realistic—if you go over the limit, you could face extra charges.
- APR (Interest Rate): A lower APR (interest rate) means lower payments. Shopping around for deals with the best interest rates can make a big difference in your monthly cost.
By considering these factors, you can adjust your PCP deal to better fit your budget!
What You Need for PCP Finance?
When applying for PCP finance, there are a few documents and details you’ll need to have ready to get your application approved. Without them, your application could be declined. Here’s what you should expect to provide:
- Personal Details: You’ll need to share your full name (including any previous names), date of birth, marital status, and your current living situation (whether you own, rent, or live with family). You’ll also need to provide a full address history covering the last three years.
- Employment Details: You’ll need to list your employers’ names and addresses (with postcodes) for at least the last three years. Make sure to include your job title and salary. If you’re self-employed, you’ll need to provide financial records to prove your income.
- Bank Details: You’ll also need your bank account information, including the account number, sort code, and the branch’s address. This is where your monthly payments will be taken from.
- Identification Documents: Lastly, you’ll need to provide a valid driver’s license, proof of address (like a utility bill), and proof of income (payslips or bank statements) to complete your application.
Having all these documents prepared will ensure your application process goes smoothly!
What if I don’t want to own the vehicle?
One of the beauties with PCP finance is that at the end, paying off the final balloon and owning your car outright is merely an option. If you’ve not got the need for your car or van any more, then:
- Just return the car and walk away: In simplest terms you just hand the car back to the dealer it came from and walk away with no more payments — though there are likely some charges that may apply (more on this in a moment).
- Return the car and pick a new one: If your car is valued at more than the balloon payment (the final lump sum) that could mark the end of a lease finance agreement, you can use this ‘equity’ towards starting another PCP.If we take that example above, what if the vehicle is worth £6,000 at the end of three years but instead was predicted to have a balloon payment value of around £5,000? It essentially gives you a £1,000 ‘credit’ that can be used as your deposit towards another car or van under a new PCP agreement. The majority choose to do a PCP on another new or used car but you can pick any one. If it turns out the car is worth less than your balloon this may be a better scenario to do so.
PCP Advantages & Disadvantages
| Advantages | Disadvantages |
|---|---|
| Lower Monthly Payments: PCP offers lower monthly repayments compared to traditional car loans. | Mileage Restrictions: Exceeding the agreed mileage limit can result in extra charges. |
| Flexibility: At the end of the agreement, you can choose to return the car, make a final payment to own it, or trade it in for a new model. | Final Balloon Payment: A significant final balloon payment is required to own the car. |
| Option to Upgrade: Easy to change to a new vehicle every few years without the hassle of selling. | No Ownership Until Final Payment: You don’t own the car until the final payment is made. |
| Maintenance Packages Available: Often includes service plans, reducing maintenance concerns. | Potential Negative Equity: If the car’s value drops more than expected, you could owe more than it’s worth. |
| Warranty Coverage: Vehicles are often still under warranty for the contract duration. | Depreciation Risk: If the car depreciates faster than expected, the balloon payment may not be worth it. |
Summary
Personal Contract Purchase (PCP) is a flexible car finance option that allows you to buy a car through lower monthly payments instead of paying the full cost upfront. At the end of your PCP finance term, you can either pay the balloon payment to buy the car, return it, or trade it in for a new deal. PCP gives flexibility for changing your car regularly, and tools like a finance calculator help manage costs. However, the car finance work involves risks, such as the car losing value over time. Approved for PCP finance or hire purchase finance, you can apply for personal finance deals suited to your dream car while considering the pros and cons of PCP finance.
Conclusion
When getting a car on finance, a PCP loan is a popular option that allows you to manage the cost of the car with lower monthly payments. The car deal you choose will depend on the cost of the car and how your finance provider values it. If you want to buy the car at the end of your agreement, you’ll need to pay the balloon payment. PCP finance explained shows that this option provides flexibility, letting you either take out a new PCP for your next car or return it. However, remember that the car will depreciate in value and you won’t become the owner of the car until you make all payments. If approved for PCP finance, you can use a car finance calculator to explore different finance options and secure the car you want.
FAQ
How do i know if i was mis-sold car finance?
The terms might not have been explained clearly, or you might have been given a deal that didn’t match your financial situation. It’s good to check if the full costs, risks, and benefits of car finance were fully explained to you.
how does car finance work?
Car finance lets you spread the cost of a car over time with monthly payments instead of paying all at once. You borrow money or lease the car and, depending on the type of finance, you may own it after making all payments.
how to finance a car?
To finance a car, you can either take out a loan or sign a finance deal with monthly payments. Just choose a plan that fits your budget, apply, and once approved, you’ll drive away and pay it off over time.
what is hp car finance?
HP (Hire Purchase) car finance lets you pay for a car in monthly installments, and once you’ve made all the payments, the car is yours. It’s a simple way to own a car without paying everything upfront.
can you sell a car on finance?
You usually can’t sell a car that’s still on finance because you don’t fully own it yet. You’d need to pay off the remaining finance first before selling or transferring ownership.
