PCP Finance - What Is It?

31st Jan 2022

PCP Finance - what is it?

If you’d like to buy a newer car or a more expensive model, and you want lower monthly repayments - a PCP car finance agreement could be the right one for you.

How does personal contract purchase car finance work?

Traditionally when you finance a car, the dealership would work out your monthly payments, by taking the overall purchase price of the car, deducting any deposit you’re paying, add interest for the duration of the agreement and then divide the total by the number of months the agreement will be for. From this, you get a fixed monthly payment.

As an example, you decide you’d like to arrange a PCP finance deal on a car costing £12,000 and pay it back over three years. You place a deposit down of £2,000, which leaves £10,000 to pay. The interest on the borrowing over three years, as an estimate, would be £1,700. Therefore, the total amount of the finance is £11,700. Divide this by 36 months, and you’d be paying £325 per month.

The difference with a PCP agreement is that a large portion of the money being borrowed is set aside to be paid at the end of the agreement. Therefore, taking from the example above, your monthly payments for the first 35 months will be lower. When it comes to paying off the large chunk of money leftover at the end with a PCP deal, you have four choices:

1) Pay back the final lump sum (also known as a balloon payment) and keep the car
2) Refinance the final lump sum over a further period
3) Exchange it for a newer car from the same dealership
4) Hand back the keys and walk away

Pro’s of personal contract purchase car finance

Great for buyers who don’t want to own the car at the end of the contract

If you prefer to upgrade to newer vehicles every 3-5 years then personal contract purchase could be the agreement for you.

Lower monthly repayments

The whole premise of this type of finance agreement is to keep the monthly repayments down by delaying a chunk of the repayment until the end of the contract.

You can choose a smaller contract length or higher specification of vehicle

Due to the monthly repayments typically being lower than other types of finance, you can often reduce the length of your contract or consider a higher spec of vehicle for a similar monthly price.

The contract can be settled at any time

If you decide to pay off the agreement early, you have the option to, and usually no fees will be incurred. However, always make sure you check this with the finance lender in question.

You have more options at the end of the agreement

In comparison to other finance agreements such as hire purchase, where you buy the car entirely, or lease purchase, where you hand the car back, you have the most alternatives with this arrangement when it comes to deciding what you want to do with the car at the end.

If you’re still unsure on what the right car finance option is for you, read our ultimate guide on hire purchase vs personal contract purchase, or you can contact our team who will be happy to advise.

If you think PCP car finance sounds like the right option for you, you can use our free finance checker to see if you qualify for a loan without jeopardising your credit score. There is no cost and no commitment when applying. You can also use our online finance calculator to figure out how much your monthly payments will be based on your deposit.

Once you're satisfied, you can apply using our safe and secure online application form.