What is Personal Contract Purchase?
Personal contract purchase (PCP) is essentially a loan to help you get a car. However, unlike a normal personal loan, you won’t be paying off the full value of the car and you won’t own it at the end of the deal unless you choose to pay the final balloon payment.
How does Personal Contract Purchase work?
A PCP agreement can be broken down into the following three steps:
1) The deposit. Typically, around 10% of the vehicle’s value is used as a deposit on the vehicle. The larger the deposit the smaller you’ll need to borrow.
2) The amount you borrow. The amount you borrow is calculated on how much the finance provider predicts the car will lose in depreciation value over the term of the deal (usually 2 or 3 years) minus the deposit you’ve put down. This is the amount you’ll pay during the deal, plus any interest
3) The balloon payment. This is a large final payment IF you want to own the car at the end of the deal. You don’t have to make this payment if you want to walk away once all the monthly payments are made and be free to lease a new vehicle.
Here's an example of how PCP works:
Let’s say that you sign up for a PCP contract over 3 years and that the vehicle costs £20,000 and the finance provider calculates that the car or van will be worth £8,000 after three years.
• You would pay a 10% deposit such as £2,000 with an £18,000 loan for the balance
• You owe £18,000. If it’s been agreed that the car will be worth £8,000 at the end of the contract, you will only need to repay £10,000 (plus whatever the interest is for the entire £18,000) over 3 years
• At the end of the contract, you either pay the final £8,000 to own the vehicle or you can choose to hand the car back to the finance provider
Please note that even if you hand the car back at the end of the agreement you will have still paid interest for the full loan amount (£18,000) over the 3 years.
What happens at the end of the PCP agreement?
You have three choices at the end of the PCP contract:
1. Purchase the vehicle by paying the final balloon payment (Guaranteed Future Value). Do check if the finance provider charges a fee for this, to cover admin costs for transferring the vehicle to you
2. Lease a new vehicle. This is perhaps the most common option for people taking out a PCP deal. Normally, at the end of the PCP contract, the car will be worth slightly more than the balloon payment. If this is the case use can use this ‘equity’ as a deposit for your next lease
3. Hand the car back. If you want to you could just hand the car back to the financial provider and have nothing more to pay, unless there are excess mileage or damage related penalty charges
What charges could I have to pay at the end of the PCP agreement?
Excess mileage charges
At the beginning of the PCP deal, you will be asked how much mileage you’ll drive each year. This helps the dealer to accurately assess the vehicle’s value at the end of the deal to set its future value. Needless to say that if a vehicle has done tens of thousands of miles it will decrease the value of the car in comparison to one which has been used infrequently.
Try to be as accurate as you can, as if you go over the agreed mileage limit, the finance provider can charge for every mile you are over and this can soon add up. Some finance providers allow you to increase the annual mileage allowance during your contract.
For more information, please see our 'Excess Mileage Charges' guide.
Damage penalty charges
If you decide to hand the vehicle back to the financial provider, the vehicle will be checked over to see if there’s damage exceeding the BVRLA organisation’s fair wear and tear guidelines. If this is the case then the financial provider will charge a penalty fee. For more information about what is considered fair wear and tear as well as how to try and avoid paying damage charges please visit our ‘End of Contract’ guide.
What are the key benefits of Personal Contract Purchase?
• Similar to Personal Contract Hire, you can drive a new vehicle every few years without the worry of selling it on
• If your car is worth more than the Guaranteed Future Value then you can use that equity towards a deposit on a new car
• Flexibility - PCP gives you options - you can choose to pay the final balloon payment and keep your vehicle for good, return the vehicle and walk away, or give the vehicle back and take out a new PCP agreement on another car or van. Low initial payment
• You may be able to refinance the Optional Final Payment
• Maintenance and servicing can be included
Considerations of PCP
• Similar to Personal Contract Hire, you will need to agree on a mileage allowance at the beginning of your contract and there may be excess mileage charges if you exceed this
• You won’t own the car until you’ve made all of the repayments
• You will need to keep the vehicle fully insured, maintained and in your possession until the full value is paid off
• If you want to buy the car you will need to pay the final balloon payment (GFV)
Disadvantages of PCP
• A charge can be made for damage to the vehicle which is outside of the BVRLA’s guidelines for fair wear and tear
• A charge will be made for excess mileage if the contracted mileage is exceeded
• You will have to decide at the end of the contract to either sell, return or keep the vehicle
Can I settle my PCP deal early?
You can normally settle your deal early, however, the finance provider will require you to pay off the difference between what your car is worth now, and what you still owe (negative equity). On the other hand, you may find that at the end of your term your car is worth more than the Guaranteed Future Value, which means you’ll have some positive equity to contribute towards your next car.
Can an 18 year-old get PCP finance?
Yes, 18-year-olds can apply for PCP finance.
What do I need for PCP finance?
When applying for PCP finance, you will need to provide some personal details, including employment details and history and your bank details.
As well as PCP options, Fleet UK also offers a range of other finance options. So if you’re not sure which is the best finance option for you, or if you have any questions about the car leasing process, please call our friendly, professional and helpful team on 02392 245570.