PCP is one of the most popular types of car finance, offering low monthly payments. See if PCP is right for you and find out what to do when your agreement ends
What is PCP car finance?
Personal Contract Purchase finance (or PCP) is the most popular way of paying for your car. PCP deals effectively involve paying back just a portion of the car’s list price over the course of a few years, meaning they have low monthly payments.
This does mean you won’t own your car at the end of a PCP agreement – instead of you have three options which we’ll get onto in this guide.
PCP is a good finance option if you like changing your car every few years, or if you want lower monthly repayments than an equivalent hire purchase (HP) finance package. Read on to learn more.
How does PCP car finance work?
The first step towards taking out PCP finance is to choose the car you’d like to buy. Bear in mind that you need to be able to afford the repayments for the duration of the finance deal.
At this stage, you can get a personalised finance quote that includes the amount of deposit you want to put down, your interest rate, and any trade-in value if you’re part exchanging your old car. If you’re happy with the terms of the deal, you can sign it and drive your car home.
PCP agreements usually start with a non-refundable deposit that goes towards paying off the finance. No-deposit car finance is available, however, if you don’t want to put a lump sum down at the start of your agreement.
You then pay a series of monthly repayments over a fixed period, usually between three and five years. These repayments cover the amount you financed, plus any interest charged.
Then, at the end of the agreement, you have three choices. You can pay an optional final balloon payment to own the car outright. You can hand the car back and walk away. Or, you can arrange to part exchange the car, putting any equity you’ve built up towards your next finance agreement. We’ll go into more detail on what to do at the end of your finance deal further down this page.
When you set up PCP finance to buy a car, look out for these key details in the finance agreement to understand whether the deal is right for you:
- Deposit: most finance buyers put down a lump sum at the start of the agreement to partially pay off the balance. Generally speaking, the larger the deposit, the lower your monthly payments will be, along with reducing the amount of money you have to pay in interest. Deposits are optional on most PCP deals, however, so you can finance a PCP car without a lump sum
- Monthly payments: these are the regular payments you make to settle the balance of your PCP agreement. Most PCP deals are spread over three or five years. The amount will vary depending on the value of the car you choose, the deposit you put down and the rate of interest
- Duration: this is simply how long the finance deal lasts in months. Typically, this is around three to five years but can be longer or shorter depending on your requirements
- Interest rate: this percentage determines the amount of interest you pay on the finance deal. You can use this figure to compare different finance quotes to understand how competitive they are
- Optional final payment/balloon payment: this sets out how much money you’ll need to pay at the end of your finance agreement if you want to own the car outright. If you decide not to pay this figure, you’ll need to hand the car back to the finance provider at the end of your agreement. Balloon payments can be quite large so you might want to consider taking out a bank loan or refinancing it to make it more affordable. In general, this figure should reflect how much the finance provider thinks the car will be worth at the end of your agreement
- Total amount payable: this is the complete cost of the finance, interest and fees over the duration of the agreement. You can look at this figure in relation to the car’s list price to understand whether the PCP deal represents good value for money
- Annual mileage: you will agree an annual mileage figure with your finance provider at the start of your PCP deal. This is important because the number of miles a car’s covered influences how much it’ll be worth at the end of the agreement, with higher mileages reducing the car’s value. Make sure you set a realistic figure here because you’ll get fined at the end of your agreement for every additional mile you’ve covered beyond the stated figure
Should you buy a car with PCP finance?
PCP finance can be a good choice if you like to change your car every few years. As we’ve explained, at the end of a PCP deal, you can bring the car back to a dealership and part-exchange it, using any equity left over to put towards the finance agreement for your next car. Be aware that you might be better off handing the car back and walking away if it’s worth less than the final balloon payment, also known as negative equity.
Most PCP cars are nearly new or brand new. This means most cars you’re taking a PCP out on will be in warranty. As a result, you’re more likely to be saved any unexpected repair costs beyond just normal servicing.
PCP might also be a more affordable way to buy a particular car you’ve got your eye on, compared to taking out HP (hire purchase) finance, which nearly always has higher monthly payments. The difference is that, as an HP buyer, you’ll own the car at the end of your agreement but, on a PCP, you’ll need to pay the balloon payment to own the car.
What should you do at the end of a PCP finance agreement?
At the end of your PCP agreement, you have three options:
- Pay the optional final balloon payment to own the car outright
- Part exchange the car and use any equity remaining towards the cost of your next finance agreement
- Hand the car back and walk away
Keep reading to understand the pros and cons of each of these three choices.
Be aware – if you don’t discuss how you want end your PCP agreement, the default option will see your finance provider try to charge you the optional final payment. This will likely be thousands of pounds, which you might not have immediately available. This could lead to that payment failing and a potential negative impact on your credit history.
That said, finance companies should always contact you before your agreement ends to discuss your options. If you’re nearing the final payment and haven’t heard anything, however, it’s a good idea to give them a call and discuss how you’d like to end the agreement.
When is paying the PCP balloon payment a good idea?
- You want to own the car outright
- The car has more mileage than agreed, or damage that you’d be charged for
- Your car may be worth more than the balloon payment (in positive equity)
The most obvious reason for paying the optional final balloon payment is if you decide you want to own your PCP car outright. In this situation, you have several options for payment – you can refinance the payment with your existing provider or with a competitor, you can put up the cash yourself if you have it available, or you can take out a bank loan to cover the amount – make sure you weigh up all options to see which is the most affordable.
You might also want to consider paying the balloon payment if you’ve gone substantially over your mileage limit, or if the car has damage that goes above fair wear and tear. In these circumstances, the finance company will fine you for excess mileage or damage if you decide to hand the car back to end the finance deal. Paying the balloon payment makes you the car’s legal owner and means finance companies won’t fine you for any mileage or damage issues. You can then opt to get any repairs done in your own time and at your own budget.
Some drivers that took out PCP finance are finding that their cars are actually worth more than the final balloon payment at the end of their agreement. In this case, you could negotiate putting the difference towards your next finance deal, or you could pay the optional balloon payment to own the car outright and then immediately sell it for its higher market price. This would allow you to pocket the difference as cash to put towards whatever you like, although does mean you have to put up with the hassle of selling your car.
When should you avoid paying the PCP balloon payment?
- You no longer want the car
- You want to stop the monthly repayments
- You want to finance another car
The most obvious situation in which you shouldn’t pay the balloon payment is if you don’t want to keep the car beyond the duration of the finance agreement. In this scenario, simply hand the car back to the finance provider and walk away with no further payments to make, after taking any mileage and damage fines into account.
If you still need a car for day-to-day life but don’t want to keep driving the car you’ve taken a PCP deal out on, you should consider part exchanging your financed car rather than simply handing it back. Some buyers are finding they have a lot of positive equity in their car, giving them a substantial deposit for their next vehicle.
When is part exchanging a PCP car a good idea?
- You want a new car or don’t want to keep your current car
- Your car is worth more than the optional final payment
- You don’t want the hassle of selling your car privately after paying the balloon
You might want to consider part exchanging your PCP car if you’d like to change vehicle at the end of your finance deal. This might be because the car you’d financed didn’t turn out to be your cup of tea, or you’d just like to try something else.
Part-exchanging a PCP car can also be a good idea if you have equity in your vehicle. This simply means that the car’s value is higher at the end of the PCP finance deal than the optional final payment.
For example, you might want to consider part exchanging your PCP car if it’s worth around £14,000 at the end of your finance deal, but the optional final payment is only £12,000. In this case, you would have £2,000 equity built up in the vehicle to put towards your next finance deal.
Many buyers that held finance agreements are now finding that they have more equity in their vehicles than they had initially expected thanks to the recent price rises seen across the motor industry. As a result, part-exchanging your car could automatically give you a chunk of deposit towards your next car – which is usually less hassle than paying the balloon payment and then selling the car yourself.
When should you avoid part exchanging a PCP car?
- You want to own the car you financed outright
- Your car is worth less than the optional final payment
- Your car has more wear and tear or mileage than specified in your agreement
It wouldn’t be a good idea to part exchange your PCP car if it’s worth less than the optional final payment at the end of the finance agreement.
In this circumstance, you would have to pay the difference (negative equity) to the finance company before being able to set up a new finance agreement. Chances are, for buyers in this situation, the best move is to hand the vehicle back to the finance company and walk away, leaving the lender on the hook for any financial loss.
Part exchanging is also not a good idea if you like the car and want to keep it at the end of your PCP deal. Here, your best bet is to pay or refinance the balloon payment, which means you’ll own the car outright once that balance is settled.
You might also want to consider other options if your car has seen more wear and tear than expected during your ownership, or has covered more miles than you’d agreed to. In this circumstance, you might be on the hook for expensive fines to repair any damage or to make up for the higher-than-expected mileage. As a result, paying the balloon payment to own the car outright protects you from having to pay any of those costs to the finance company.
When is returning a PCP car a good idea?
- It is worth close-to or less than the optional final balloon payment
- You no longer want the car
- You don’t want to continue with finance payments
Returning your PCP car at the end of your finance deal might be the right option for you if you don’t want to keep the car, or are no longer able to keep up with the repayments.
You might also want to consider returning your PCP car if its value is close-to or even less than the optional final balloon payment. In this situation, if you wanted to keep or part exchange the car, you would have to pay the optional final payment plus the difference between it and the car’s value. In this case, returning the car to the finance company is probably the best bet – your agreement will end and you won’t have to pay the difference between the vehicle’s value and the optional final payment.
When should you avoid returning a PCP car?
- It is worth more than the optional final balloon payment, because you can put the equity towards your next finance agreement
- You want to pay the balloon payment and own the car outright
- The car has more damage or mileage than set out in the agreement, leaving you with a big fine for repairs
It might sound obvious, but returning a car on PCP finance probably isn’t right for you if you want to keep the car, or trade it in for another financed vehicle. If your car is worth more than the optional final payment at the end of your finance deal, you can put any equity you have built up towards the cost of your next finance deal. You also have the option to pay the balloon payment to own the car and then sell it for its market value, pocketing the difference to use however you want.
Bear in mind that PCP deals include fines for any damage that exceeds fair wear and tear, or for any mileage you cover beyond what was agreed in your finance deal. If your car has picked up a few more serious battle scars in the time you’ve owned it, or if you’ve driven substantially further than the agreed mileage, it might be worth considering paying the balloon payment to own the vehicle, because you might face a substantial fine upon returning the car. If you pay the balloon payment, the finance company won’t charge you for mileage or damage because you will be the car’s owner. At that point, you can then choose to get any repairs done in your own time.