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Personal Contract Purchase (PCP): A Comprehensive Guide

Personal Contract Purchase (PCP) is a popular car finance option in the UK, offering flexibility and lower monthly payments compared to traditional loans. It's particularly appealing to those who prefer driving newer cars without committing to full ownership upfront.

 

How Does PCP Work?

A typical PCP agreement involves the following steps:

  1. Deposit: You pay an initial deposit, usually around 10% of the car's value.
  2. Monthly Payments: You make fixed monthly payments over a set term (commonly 2 to 4 years), covering the car's depreciation during that period.
  3. Guaranteed Future Value (GFV): At the start, the lender estimates the car's value at the end of the term, known as the GFV or ‘balloon payment’.

 

End-of-Term Options

  • Return the Car: Hand back the vehicle with no further payments, provided it's in good condition and within the agreed mileage limit. 
  • Pay the GFV: Make the final balloon payment to own the car outright. 
  • Part-Exchange: Use any equity (if the car's market value exceeds the GFV) as a deposit for a new PCP deal. ​ 

 

Advantages of Personal Contract Purchase

  • Lower Monthly Payments: Since you're financing the depreciation, monthly costs are typically lower than Hire Purchase agreements.
  • Flexibility: At the end of the term, you can choose to keep, return, or upgrade the vehicle.​
  • Access to Newer Models: Lower payments can make higher-spec or newer cars more accessible. 

Considerations

  • Mileage Limits: Exceeding the agreed mileage can incur charges, typically between 5p to 15p per extra mile.
  • Vehicle Condition: Returning the car with damage beyond fair wear and tear may result in additional fees.
  • Final Payment: If you decide to keep the car, the GFV can be a substantial lump sum.

 

Is PCP Right for You?

PCP might be suitable if:

  • You prefer lower monthly payments.
  • You like changing cars every few years.​
  • You're uncertain about long-term ownership.

However, if you drive high annual mileage or intend to keep the car long-term, other financing options, like Lease Purchase (LP) or Hire Purchase (HP), might be more appropriate.