Personal Contract Purchase (PCP) is one of the most popular ways to finance a car in the UK. More drivers than ever are choosing to finance with PCP and it’s easy to see why. From low monthly payments to adaptable finance terms, this form of car finance gives drivers much more flexibility than other agreements on the market. If you’ve never had a car on finance before or are looking to get a car on PCP, the guide below looks at this form of finance in more detail and helps you decide whether its right for you.
What is PCP?
It’s actually a form of hire purchase but has a completely different structure to how a hire purchase deal works. Instead of spreading the cost of your chosen car into equal payments with interest, you instead cover part of the cost of the car. This helps to make monthly payments much lower than hire purchase and you could even get a newer, better car for a lower monthly payment too! PCP can be offered on both new and used cars and can make buying a brand-new car more accessible for many drivers.
How does PCP car finance work?
We agree that PCP car finance can be a little more complex than other finance agreements, but the benefits can be endless. Through a PCP car deal, you spread the cost of getting a car into affordable monthly payments over an agreed term, usually 3-5 years. Instead of splitting the value of the loan with interest into monthly payments, you differ much of the cost of the loan until the end of the agreement in the form of a balloon payment. This makes monthly payments lower and also gives you more freedom at the end of your finance agreement. Once each and every payment has been made over the term, on time and in full, you have three options at the end of your deal.
- Hand the car back to the dealer and the agreement has ended.
- Use any positive equity in the deal towards a new car on a new PCP agreement.
- Pay the large balloon payment off and keep the car.
Benefits of choosing Personal Contract Purchase:
There are a number of reasons why you may be attracted to a PCP deal. For many drivers, it comes down to the below reasons.
- Low monthly payments. Due to the structure of PCP, you can benefit from lower monthly payments when compared to other forms of finance.
- Flexible finance term. You can choose to finance a car over a term that suits you and your budget. You can choose a term between 3-5 years depending on your affordability.
- No deposit options. Many PCP cars on finance come with no deposit to pay which is great for drivers who don’t have any savings to put down at the start of an agreement.
- Low APR available. Interest rates affect the cost of borrowing, and many PCP deals can be obtained with little or no interest to pay!
Things to consider before committing to getting a PCP car on finance:
There are so many benefits of PCP that it wouldn’t be fair to not mention a few factors that could hold you back or mean it’s not suitable for your situation.
Credit score.
Your credit score can affect your ability to get approved for car finance and when it comes to PCP, it means you could face higher interest rates. The best rates are usually reserved for those with the best credit scores and PCP with a bad credit score may not be the most cost-effective option for you.
Mileage and damage charges.
At the start of your PCP deal, you will need to set an agreed annual mileage and agree to keep the car in good condition. If you exceed the agreed mileage and hand the car back at the end of the deal in a condition that goes beyond general wear and tear, there are will additional charges to pay.
Large balloon payment.
PCP isn’t the best agreement to choose if your goal is to own the car at the end of the deal. Whilst it can be done, it means paying off the large balloon payment before you can take ownership. These payments can be thousands of pounds and for many drivers it’s an unrealistic option to purchase a car and become the legal owner.