What is a PCP deal?

Written By Andrew Brady

Everything you need to know about a Personal Contract Purchase
How are PCPs calculated?
The pros and cons of a PCP

Buying a car is no longer a case of handing over a large lump of money or paying high interest rates to secure a loan. Deals such as Personal Contract Purchase (PCP) are a cheap and flexible way to pay for used or new cars.

PCPs have proved so popular they’ve resulted in a huge jump in the number of people who run cars through finance. They let you drive a better car than you might otherwise be able to afford. They give you various options at the end of the term. And you can structure payments to suit your monthly budget.

Here’s what you need to know to get the best PCP deals.

What is PCP finance?

A PCP is a super flexible and cheap way to run and possibly then buy a car on finance. You spread the cost of owning the car over a deposit, monthly payments and a final lump sum. The terms often last three or four years. After this, you have several options to choose from. You could pay a final, pre-arranged amount to own the car outright. You may choose to simply give the car back. Or you can use any equity that is left in the car as a deposit on another PCP for a different model.

How does PCP work?

When you run a car with a PCP, you’re only paying the depreciation, instead of the entire value of the car. That’s the difference between what the car was worth at the start of the arrangement and what it will be worth at the end. It’s why monthly PCP payments might be lower than most other finance methods.

For this to work, the finance company that owns the car needs to calculate the Guaranteed Minimum Future Value (GMFV). Also known as the ‘balloon payment’, this is what you need to pay if you want to own the car at the end of your term.

How is a PCP rate calculated

There are several variables that you can change when working out how much a PCP will cost in monthly instalments.

You could adjust the size of the deposit. The larger this is, the smaller the monthly payments will be.
You might want a longer term. The newer a car is, the more it depreciates. So, if you have a car on a PCP for two years, you will pay higher monthly instalments than if you spread them over four years.
You could also alter your mileage. This is agreed at the start of a PCP and is important for setting your monthly payments, because the more miles a car has done, the less it will be worth. So the more miles you cover, the higher your monthly payments will have to be. If you do go over your agreed mileage there will be very unpleasant penalties.

What are the pros of PCP?

With a PCP you’re only paying the car’s depreciation. So, unlike hire purchase (HP) arrangements, your monthly payments will be lower. But like HP, you can still own the car at the end of the term.

One benefit of the PCP is it’s a bit like a very extended test drive. You don’t have to decide whether you want to keep the car until you come to the end of the term.

When that time does come, you’re flexible over your next move. If you love the car, you can keep it. If your life has changed and you need something bigger, smaller, sportier or cheaper to run, you can change cars when the deal comes to an end.

And you’re not tied to any one manufacturer. If you decide you want a different make, you can always pay the GMFV and put any equity you have in your previous car towards a deposit of a different model.

What are the cons of PCP?

You don’t own the car until you’ve made the final GMFV ‘balloon’ payment. Up to then it’s actually owned by a finance company.

You also need to be realistic and accurate when forecasting your mileage. Exceed your agreed mileage and you’ll pay a penalty for every extra mile you do. But the lower the agreed mileage, the higher the balloon will be should you decide to buy the car.

Sometimes, the GMFV can be set too high. This is good for monthly payments because they’re lower. But you’ll pay the price at the end of the PCP because you’re unlikely to have any equity in the car. This means if you want to start a new deal, you won’t have any money to use as the deposit for its replacement.

How to get the best out of a PCP

You get the best value for money out of a PCP if you choose a car that loses its value slowly. Cars like this could actually work out having lower monthly payments than a cheaper model that depreciates faster.

You should also look at whether the seller is offering a ‘deposit contribution’. This is where the seller gives you a discount by another name. And the lower the Annual Percentage Rate (APR), the less you’ll pay during the term of the deal.

To really benefit from a PCP, you should build up ‘equity’ in the car. This means sticking to or doing fewer than the agreed number of miles. You should also look after the car. Every stain on the seats, kerbed wheel and parking scrape will have an impact on your car’s value.

Keep damage to a minimum and, if you’re lucky, your car will be worth more than the GMFV at the end of the term. You can then put that money towards its replacement.