What is PCP Car Finance?

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Personal Contract Purchase (PCP) car finance is a very popular way to finance a car and is ideal for people who want lower monthly repayments and who prefer to change their car on a regular basis.

Broadly speaking, PCP works similarly to other loans or car finance options like Hire Purchase, but there some important differences. Taking out a PCP loan enables you to make monthly payments for a fixed period of, typically, three or four years (the term). At the end of the agreed term, you then have a choice to make, you can either:
1) Make a larger final payment, known as the Guaranteed Minimum Future Value (GMFV) or more commonly a 'balloon' payment, to clear the remaining balance and own the car outright
2) Exchange it for a new car without making the balloon payment. To do this, either the current car needs to have maintained a higher value than anticipated by the lender (the GMFV), or you have enough deposit to bridge any shortfall
3) Return the car to the lender and walk away without making any further payments providing that the vehicle does not exceed the agreed mileage (stated in the finance agreement) or has above average wear and tear
There are a few important points to consider:

Firstly, you must stick to the agreed mileage limit and wear and tear conditions to avoid extra charges at the end of the agreement. Be careful how you estimate your annual mileage as you will be charged for each additional mile at the end of the term.

Secondly, PCP car finance could work out more expensive overall than a Hire Purchase/Conditional Sale agreement due to additional charges (mileage etc); and especially if you also decide to enter into a second finance agreement to pay off the deferred future value of the car (balloon payment).

In addition, whilst it may be a benefit for some, you do not automatically own the vehicle at the end of the fixed payment term. You are then forced to what to do with the car, and it may not always be an ideal time to do so.

Finally, as the registered keeper, you are responsible for things such as DVLA Vehicle Tax, insurance, servicing, and maintenance. However, since you do not own the car during the agreement, you cannot sell or modify it without the lender’s permission.

How does PCP car finance work?

Personal contract purchase is fairly easy to understand, the contract you enter into with the lender has three components:
1) You pay a deposit (which can in some case actually be zero)
2) You'll then pay a fixed number of monthly payments
3) At the end of the agreement there is a final 'balloon' payment, you have three options:
● Pay the 'balloon' and take ownership of the car
● Don't pay the 'balloon' and hand the car back to the lender
● Trade the car in at a dealership for a new car (they'll settle the balloon and you may have a deposit as well)
Monthly Payments
Guaranteed Future Value
A diagram showing how PCP car finance works

Is PCP car finance right for me?

A personal contract purchase agreement could be right for you if:
● You like the idea of lower monthly payments and are happy to hand the car back or swap for a new one at the end of the contract
● You happy to drive within any mileage restrictions in the contract
● You prefer to pay a regular fixed amount for your cars over a term of, typically, 3 to 4 years
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