Car deals on PCP

FAQs

• What is PCP car finance?

  PCP car finance is one of the most popular ways to buy a new or used car in the UK. PCP - personal contract purchase – allows buyers to enjoy attractively low monthly payments, enabling them to drive models that would be out of reach using other forms of finance, such as hire purchase (HP).

  There are three parts to a PCP car finance deal:

  • The initial deposit is typically around 10% of the total price of the car, although can be more or less depending on your circumstances
  • The monthly payments which typically run anywhere from two to five years
  • The optional final payment, sometimes called the balloon payment. This can be paid at the end of the agreement for you to keep the car. If you decide not to, you can hand the car back in lieu of the balloon payment and walk away; or use any equity in the car as a deposit on a new one.

  While you can increase the size of the deposit to get your monthly payments down, the optional final payment is usually fixed because it will be equal to the ‘guaranteed minimum future value’, or GMFV. This is an estimate of the car’s value at the end of the agreement.

• Should I choose PCP car finance?

  Buyers often choose PCP finance because they have a deposit either in the form of cash or a part-exchange, and the prospect of low monthly payments appeals. Others choose PCP because it gives the flexibility to swap cars every few years, and you’re not tied into staying with the same brand at the end of the agreement.

  It’s also worth noting that if you see a low-rate or 0% APR car finance deal advertised, it probably concerns a PCP deal. Car manufacturers like them because the monthly deals are very attractive, and it makes it easier to generate repeat custom.

  If the ability to chop and change cars is your primary motivation, leasing may be the better option because you’re not usually paying quite so much up front.

• What are the positives of PCP?

  There are many positives to PCP deals, not least their widespread availability for new cars and many used models, too.

  One key advantage is that you’re protected from unexpected drops in value. For example, the political and environmental pressure on diesel cars has seen their values fall faster than expected in recent years.

  The option to buy the car at the end of the agreement is an obvious draw, especially for buyers who’ve formed an attachment to their vehicle.

  Many buyers like the flexibility of being able to chop and change cars after every PCP if they want to, having factored in the approximate cost of the monthly payments into their household budgets.

• What are the disadvantages of PCP?

  You may find that over the entire course of the agreement you’ll pay more interest than you would on a hire purchase deal. That’s because you’ll pay interest on both the monthly payments and the balloon payment.

  The guaranteed minimum future value (GMFV) is calculated based on a mileage estimate, although you can set this limit as part of your negotiations. Cover too many miles and you’ll incur excess mileage fees which can vary between 3p and 10p per mile – and soon add up. Similarly, the car's value will be based on it returning in reasonable condition, so you’ll need to ensure it’s properly maintained and any damage is fixed prior to return to avoid penalties.

• What happens at the end of the PCP agreement?

  At the end of a PCP agreement, three things can happen:

  • You can opt to make the optional final payment (balloon payment) and keep the car with no more to pay. Should the car be worth more than the guaranteed minimum future value (GMFV), you could even sell it and keep the difference.
  • You can hand the car back and walk away free to make another purchase at your leisure
  • If your car has equity in it, you can trade it in as part of a new finance deal. The equity can be put towards the deposit on your next car to help reduce your future monthly payments.

  It’s a good idea to speak to your dealership early to discuss your options in depth. Waiting until the agreement expires could leave you without a car temporarily.

• Can I finish PCP early (pay off or cancel)?

  You can settle a PCP early. To do this, you’ll need to request a settlement fee from the finance lender, which will comprise the outstanding monthly repayments and balloon. Just remember that you may incur admin and early settlement fees.

  But if you’re experiencing financial difficulties, this may not be an option. Here you have several options, but you must discuss these with your finance lender first. You may have the option to:

  • Sell the car and use the proceeds to pay the finance lender
  • Return the car under a voluntary termination if you have paid at least 50% of the finance agreement – or are able to pay funds equal to 50% as part of the settlement. If your car is in negative equity, you may need to make up the balance to settle the finance.

  Remember that settling PCP finance early can sometimes be cheaper than letting the agreement run its course, but with a range of possible fees, it could also be more expensive. Discuss the options and your personal circumstances with the lender.

  You will pay the outstanding balance, any admin fees and the final balloon payment agreed at the beginning of your contract.