What is PCP?
PCP (or personal contract purchase) is a great way of getting your hands on a new car without having to stump up a huge wad of cash in a oner, though it does also represent a significant long-term financial commitment.
Its a great way to get a brand new car – which will be cheaper to run than a second hand model and has the peace of mind of a warranty – for a manageable monthly payment.
PCP is great if you’re looking to get your hands on a brand-new car that has all the latest tech, is relatively fuel-efficient and very reliable and – even if it isn’t – is covered by a full manufacturer warranty.
You can also now often get PCP deals on second-hand cars which still have the balance of a manufacturer’s warranty, though, because the car will already have lost a fair chunk of its value, you’ll likely pay a higher interest rate to cover the deficit.
PCP – how does it work?
PCP – or a Personal Contract Purchase – is a way of getting a new car for much less than it would cost if you were buying the car outright. Essentially, you are paying for the car’s depreciation and a little bit of profit for the dealer.
So you pay a deposit upfront, monthly payments (the larger the deposit, the smaller the payments) and have the option to pay a final balloon payment at the end of the agreement to own the car – or you just hand it back to the dealer.
To know how much the deal will cost you, compare the car’s on-the-road (OTR) price to the total-amount-payable (TAP) price quoted in the agreement. That said, PCP deals come with an annual mileage limit – breach it and you’ll have to pay to cover the car’s respective drop in value.
Keep reading for a full breakdown of the costs and what they mean in a PCP deal.
PCP explained – the deposit
The deposit on a PCP used to be about 10 per cent of the value of the car but recently the deposit has become much lower on some deals – for example, we saw a BMW 1 Series with a £349 customer deposit – identical to the monthly payment thereafter. Manufacturer deals also often include a deposit contribution from the manufacturer, but only if you take up their less-competitive interest rate. Compare the OTR price to the TAP price for a black-and-white understanding of the costs.
PCP explained – monthly payments
The monthly payments represent the bulk of the money you’ll pay for the car and are usually split over two, three or four-year deals. Generally speaking, the shorter the contract period, the less you’ll pay on interest.
PCP explained – annual mileage
The annual mileage is the number of miles you can cover in the car without affecting its value at the end of the agreement – more miles means the car will be worth less on the secondhand market. To cover this shortfall, you’ll pay an excess mileage charge usually of about ten pence a mile. To avoid taking a hit at the end of the agreement, set yourself a realistic annual mileage when you’re customising your deal.
PCP explained – on-the-road price
The OTR price is the price that you would pay for the car if you bought it outright – essentially the price without interest charges.
PCP explained – total amount of credit
The total amount of credit is the sum of money you’re borrowing to pay for the car, less the initial deposit. The number looks large but includes the value of the car when it’s sold or you buy it at the end of the agreement.
PCP explained – final or balloon payment
A PCP deal – and its final payment – is built around the pre-agreed resale value of the car plus any charges you may have incurred for going over the annual mileage set out in the agreement.
The final payment is not compulsory, you can hand the car, swap it for a new model and start the whole process again. If so, the new finance agreement will be based on the value of the car you're trading in. For example, if it’s in excellent condition and has a low mileage, it might be worth more than the final payment and you’ll be able to put this excess towards your new car.
If you do decide to pay the final or balloon payment you will then actually own the car. This has some benefits. If you keep the car you’ll be the only owner named on its V5C logbook, plus you have the peace of mind of knowing the car’s history and that it has been properly maintained. That said, there’s usually an additional charge to buy the car.
PCP explained – total amount payable
This is the total amount you’ll pay for the car including interest – subtract the OTR price from the TAP price and you’ll be left with the cost of the credit.
PCP explained – annual Percentage Rate
The Annual Percentage Rate is the annual rate of interest you’ll pay on the credit you have borrowed to pay for the car. The better your credit record, the lower the APR and the less you’ll pay for the credit.
Your commitments on a PCP deal
A PCP deal will come with certain requirements in the contract. For example, you’ll be required to stick to a prearranged mileage and will have to pay for any extra miles over that. You’ll also have to get it serviced on time and to the manufacturer’s recommendations and look after it – any damage deemed to be over and above general wear and tear you will need to have repaired at the end of the agreement.
Guaranteed Asset Protection (GAP) insurance is also a worthwhile investment to cover you against any value shortfall if you’re car is written off and the insurance payout doesn’t cover the money still owed on the PCP agreement.
Is a PCP deal right for me?
PCP deals are an attractive way of getting behind the wheel of a new car without the large monthly payments you’ll face with a traditional finance deal.
You get a car that you can expect to be more reliable and cheaper to run than an old secondhand car you might buy outright. It also means you get the latest technology, which is particularly important now we live in a connected world.
You’ll also get a car with the full balance of a manufacturer's warranty and can swap it for a new car with a fresh warranty at the end of the agreement – so you’ll never have to worry about mechanical problems.
Disadvantages of a PCP deal
PCP deals might be a clever way of getting yourself behind the wheel of a brand new car but they also have disadvantages and a big one is that you’ll be locked into making a sizeable monthly payment for several years.
You might prefer to buy a second-hand car with a one-off payment. That may also be a better option if you prefer to own a car rather than be the custodian of a car that is actually owned by a finance company.
Over the course of a PCP deal, you’ll pay a large deposit at the start of the agreement followed by monthly payments (usually up to 48 months) with an optional large payment at the end to buy the car – or hand the car back to the dealer with no final payment.
To make repayments as low as possible, you’ll want to pay as large a deposit as you can afford at the start of the deal and then spread the payments for as long a period as possible. That said, while the monthly payments will be smaller, the longer the period the more interest you pay.
You can use PCP to finance an old car but the deal you’ll get will likely be less competitive (interest rates will be higher) than it would be on a new car. A second-hand car will already have suffered a large chunk of depreciation so the dealer will get less money when they sell it on at the end of the agreement.
BMW UK | BMW Select (PCP)
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