If you’re looking for finance to buy a car, you’ll no doubt have come across Personal Contract Purchase (PCP) car finance amongst other terms like car loans and hire purchase (HP). Here we’ll look at exactly what PCP is and how it works, plus the advantages and disadvantages of PCP.

What is PCP Car Finance?

PCP is a type of car finance that allows you to pay for a car over time, instead of paying for it all up front.

With PCP, you’ll make a series of monthly payments towards the value of the car. At the end of the contract, if you want to keep the car you’ll need to make a large payment – known as a balloon payment. Once you do, you own the car outright. The structure of PCP – in that it requires a large payment at the end of the contract – means that your monthly payments (and sometimes your deposit) are often lower than other types of car finance.

If you don’t make the balloon payment, you’ll hand the car back to the dealer or change to another PCP deal on a different car.

Unlike other forms of car finance, PCP accounts for the cost of the depreciation of your car across the length of your contract. This amount is based on what the car is predicted to be worth at the end of the contract, known as the residual value.

Most PCP deals have annual mileage restrictions, typically 10,000-15,000 miles. You’ll agree this as part of the PCP deal you sign. Excess mileage charges at the end of the term can be as high as 15p per mile so this adds additional costs if you do more miles than you agreed you would. Also, extra mileage can directly affect how much money your car will be worth at the end of the agreement.  

How does PCP Car Finance work?

PCP car finance works like this:

• Choose a deal: Take a look at the available cars – whether new or used – and evaluate the different PCP deals available.
• Make a deposit: You usually need to pay some of the car’s price upfront. Often this is around 10%. If you currently own a car, often you can use this as all or some of your deposit.
• Make monthly payments: You pay back the finance in monthly payments, usually for a term of around three to five years. Every payment you make gets you closer to owning the car outright.
• Balloon payment: At the end of the agreement, you can make a balloon payment of the remaining sum to keep the car. Or you can walk away from the deal or trade the car in for a new car on a new PCP deal.

Pros and Cons of PCP

There are both advantages and disadvantages to PCP, including.

Advantages:

• Typically, lower monthly payments compared to other forms of car finance
• You may be able to afford a new or newer model car
• The flexibility to buy the car outright or hand it back at the end of the term.

Disadvantages:

• You could lose the car if you miss payments
• If you don’t make the balloon payment, you won’t own the car
• You will be charged for any excess mileage over what you agreed to
• Usually, the car needs to be worth more than £10,000 to get PCP car finance.

How long a term should I choose?

It’s up to you. Most PCP car finance deals run between three and five years. If you choose a longer deal, your monthly repayments will likely be smaller. But if you decide you want to end your contract early, you’ll be charged.

A three-year PCP car finance deal on a brand new car exempts you from having to book MOTs during the initial contract term. You’ll also stay within your warranty too, which helps with any repairs.

Other Car Finance Options

PCP car finance isn’t your only option. You can also consider hire purchase (HP) or a car loan. With hire purchase, you’ll own the car outright at the end of the agreement. There’s no need to make a balloon payment, but your monthly repayments will likely be bigger than on a PCP deal.

A car loan means you buy the car outright using a personal loan. You then pay the loan provider the sum borrowed, plus interest, through monthly repayments.

What happens at the end of a PCP agreement?

You have three main options at the end of your PCP deal:

• Own the car outright: Make the final balloon payment at the end of the deal and the car is yours.
• Trade the car in: Use the positive equity you’ve amassed in your current car and put it towards the deposit on a new car on a new PCP deal.
• Return the car: Walk away from the PCP deal without having to pay anything. You will lose the equity in the car.

What happens if I damage a car on PCP?

With PCP finance, the monthly repayments cover the estimated depreciation of the car on a monthly basis. This is based on what the finance company thinks it will be worth at the end of your contract.

If you return the car in good condition with fair wear and tear, you shouldn’t have to pay anything extra. This is because the finance company should view it as you keeping your end of the bargain and maintaining the value of the car.

If you return the car with damage that goes above and beyond fair wear and tear, it will likely be worth less than the finance company was expecting and what they based your monthly repayments on. The finance company will want to recoup this lost money and will likely charge you for it.

Should I buy a used car on PCP?

PCP was originally intended for the new car market, but we’re seeing more and more PCP deals for used cars now too. And with high residual values for used cars and low interest rates, it’s often cheaper to buy a newer used car on PCP than an older model with cash.

You’ll benefit from lower monthly repayments than for a new car, as the biggest drop in depreciation has already happened. A used car will hold more of the value from when you take out the agreement.

On the other hand, you’ll need to consider wear and tear and the increased maintenance costs of a used car. If you want to trade it in early, there will be a fee to consider too.

How Asda Can Help

At Asda, we’re here to help you with all things finances. We can assist you with a personal loan to buy a car, as well as other car finance options like PCP, and help you understand all things money through our financial support. Our jargon buster is the first place to start if you don’t understand any terms around car finance.

Compare car finance options using our trusted panel of lenders today!  

PCP FAQs

Is PCP finance a good option?

PCP finance can be a good option for car finance. It depends on the type of car you want and your financial situation. You can often get a more expensive car with PCP and your monthly payments will likely be lower than other car finance options. You will however have to make a balloon payment at the end of the deal to own the car outright.

Is PCP or HP better?

It depends on your personal situation. People often choose PCP as they can likely afford a more expensive car with lower monthly payments. The monthly payments on HP are likely higher, but you’ll own the car outright at the end of the deal. With PCP, you only own the car outright if you make the final balloon payment.

What are the negatives of PCP?

Negatives of PCP include the fact you could lose the car if you miss payments. Plus, if you don’t make the balloon payment at the end of the deal, you won’t own the car outright. Usually, the car also needs to be over £10,000 to get PCP.

Is PCP better over 3 or 4 years?

It depends on you. If you choose a four year deal, your monthly payments will likely be smaller. But opting for a three year deal on a brand new car means you won’t have to pay for an MOT and you’ll be in warranty throughout the term of the deal.

Is PCP better than leasing?

The big difference between PCP and leasing is that with PCP, you have the option of owning the car at the end of the deal – if you make the balloon payment. This isn’t an option with leasing. On the other hand, with PCP it will likely cost more over the term of the contract.

Can you pay off PCP immediately?

Yes, you can pay off your PCP car finance early. But you will have to pay a fee. This fee is capped however, so the finance companies can’t charge exorbitant amounts.

Do you own the car at the end of PCP?

At the end of your PCP deal, you’ll own the car if you make the balloon payment. If you don’t, you can walk away from the deal or use the equity in the car as a deposit for a new car on a new PCP deal.

How much deposit should I put down on PCP?

It’s up to you. Usually, car finance companies expect around 10% as a deposit. The more deposit you can afford to put down, the smaller your monthly payments and balloon payment at the end of the deal.