All you need to know about PCP

Personal Contract Purchase, commonly known as PCP, is one of the most common car finance options on the market. You’re essentially loaning a car from a finance company, making fixed monthly payments over an agreed period of time. This is generally between 24 to 48 months, though some finance providers offer longer terms.

How Does PCP Work?

As with a Hire Purchase (HP) agreement, with PCP you’d make an initial deposit, and then monthly repayments. But unlike HP, where your instalments go towards the total value of the vehicle, with PCP you’d be paying off the depreciating instead. This is the difference between what the car is worth at the time of purchase, and what it’s likely to be worth at the end of the contract. 

PCP is a relatively straightforward process - there are three main parts of the agreement, which we’ve outlined below.

Make a Deposit

The first step is making a deposit. The amount of this will depend on your agreement with the lender, though it tends to be approximately 10% of the vehicle’s value. So the cost of the car may drastically alter how much your deposit will be! Some lenders do offer PCP agreements with no deposit, though this is not that common.

It’s also important to keep in mind that your deposit goes towards paying off the depreciation of the car. Therefore the amount you pay upfront will affect your monthly repayments - the bigger the deposit, the smaller your instalments. 

Monthly Repayments

As mentioned above, your monthly payments will pay off the vehicle’s depreciation, though you’ll also need to factor in the Annual Percentage Rate (APR). This is the interest you’ll pay on top of your main payments. The APR will depend on both the lender and your individual circumstances.

When you make an application through Wheelie Good Finance, we’ll do our best to put you in touch with a lender who can offer a deal that suits your budget and requirements.

Your Contract Ends

Most PCP agreements last around two to three years. When your contract comes to an end, you’ll have three options:

  1. Make the Balloon Payment: A balloon payment is the amount that is left over after your contract has ended. The amount you’d have to pay will thus depend on the size of your initial deposit, the value of your car, and your monthly instalment amount. Once you make the balloon payment, the car will belong to you outright.
  2. Trade in For a New Car: This option only applies if your vehicle is worth more than initially estimated. For instance, if your original contract stated the car would be worth £6,000 at the end of your agreement, but it’s worth £7,500, you’d be able to put the £1,500 difference towards the cost of a new car. This is known as equity. You can’t claim the equity back as cash, so if you don’t want a new car, your only option is to walk away.
  3. Return the Car to the Lender: After your agreement finishes, you can simply return the car to the lender. Terms and conditions will of course apply, so it’s a good idea to check your contract to see whether there are further stipulations.

Is PCP the Best Option For You?

Most people choose PCP finance if they’re looking for cheap monthly payments, and think they are likely to change their car within the next few years. But there are a number of other factors to consider when it comes to deciding which car finance solution to opt for, and whether PCP is the right choice for you.

Advantages of PCP

  • The monthly instalments with PCP tend to be smaller than with hire purchase
  • If you’re looking to upgrade your vehicle at the end of the contract, it’s easy to roll over your PCP agreement
  • If you have more equity than expected once your agreement ends, you can put this towards the cost of a new vehicle 
  • You may be able to get a more modern and fuel efficient car than if you were looking to buy it outright, as you can spread the cost over a longer period of time
  • You have the option to purchase your vehicle outright at the end of your term

Disadvantages of PCP

  • If you’re unable to keep to your monthly payments, you would need to return the vehicle to the lender
  • Should you be unable to afford the balloon payment when your agreement ends, you would need to return the car or set up a new PCP contract 
  • There are a number of terms and conditions, such as keeping the vehicle in good condition to avoid damage fees, and not going over the agreed annual mileage limit to avoid a financial penalty

Other Things to Consider

  • Are you looking for low monthly payments? If so, PCP is probably the best option for you, as it’s one of the cheapest ways to finance a car
  • Is it likely that you’ll want a new car in a few years? PCP agreements are easy to roll over, so you can upgrade your vehicle when your contract comes to an end
  • What is your credit rating like? If you have a good credit score, you’re more likely to get a better deal on your PCP agreement
  • How far do you drive in a year? Most PCP cars come with a mileage limit, so you need to ensure you’re able to stick to it

PCP Deals

If you do decide that a Personal Contract Purchase agreement is the best option for you, you’ll obviously want to find great PCP deals. So how do you get the lowest possible interest rate, while still ensuring that you get the car you want? 

The main thing to remember is that the PCP deal you’re offered will most likely be based on your credit rating. If you have bad credit, you may not get as low an interest rate. People with a good credit score, as this indicates that they’ve managed their money well in the past, tend to be offered better PCP deals. 

If you do have a poor credit history, there are things you can do to improve your score. For instance, did you know that you could get an instant boost through Experian? Once you’ve made an account with them, Experian can use things like your Spotify and Netflix subscriptions to demonstrate that you’re able to make regular payments. This can then instantly improve your credit rating. 

It’s also good to bear in mind that the lenders we work with won’t expect you to have perfect credit! Many car finance providers will take other things into account when making a loan decision, and won’t just look at your credit score.