Everything You Need To Know About PCP Car Finance

How we buy our cars has changed in recent years. Where 20 years ago, you’d buy a car new, run it into the ground, and replace it only when the repairs started costing more than the car was worth, drivers of today are able to change their car every few years thanks to the finance options available, and PCP car finance is one of the more popular options. But, what the devil is it? And, more importantly, is it the right type of car finance for you? Let’s find out.

What is PCP car finance?

PCP stands for Personal Contract Purchase, but the name doesn’t do much to explain what this kind of car finance is. The first thing you’ll do with PCP is pay a deposit for the car you want. You’ll then pay monthly installments for a set amount of time, and end your agreement by paying a lump sum. But, you’ll only pay this lump sum if you want to keep the car at the end of the agreement. If you don’t want to keep the car, you can return it to the dealer, and the agreement will be over and done with. If you wish, you can then start a new agreement on another car. Dealers know there’s a strong possibility that you’ll choose to do this, and they like it when you do as they secure your repeat business.

PCP car finance is a type of loan. The finance will probably not be provided by the dealer themselves, but by a provider that they’ve partnered with to offer it to you. You’ll need to meet the finance provider’s criteria in order to be approved for a PCP plan, and the checks they’ll carry out to make sure you meet their criteria will likely include a credit check. So, it could pay to take the time, now you’re in the first stages of thinking about buying a car, to go through your credit report and make sure it’s in a good enough place that you’ll be approved for car finance.

While PCP plans are mostly used to buy brand new cars, some dealers also offer them on used cars. At its core, PCP works the same way whether you’re buying new or used. You’ll still pay a deposit, monthly installments, and a lump sum at the end. But, you may find that some of the special offers you might come across when you use PCP to buy a new car, such as low deposits or reduced interest rates, are not available if you choose this type of car finance to buy a used car.

How does PCP work?

When you choose PCP car finance, you’ll pay a deposit at the start of the plan, make monthly payments throughout the plan, and then if you want to keep the car at the end, you’ll pay a lump sum. Sounds pretty simple, right? Hang in there, because it’s not quite as simple as it seems.

When you sign up to a PCP, you’ll agree to a number of terms and conditions that determine how much the car will be worth at the end of your PCP agreement. These will include keeping the car in a good condition, having it serviced regularly, and sticking to a certain mileage cap. You’ll be asked how many miles you intend to do, so that the plan is reasonable and will allow you to use the car as you need to. These conditions are then used to work out the car’s Guaranteed Future Value, or GFV. GFV is what the car is expected to be worth at the end of your agreement. It’s used to calculate the lump sum you’ll be due to pay at the end of your PCP, and plays a part in what your monthly payments will be, too.

Let’s look at an example:

• The car you want to buy has a list price – the price you’d pay to buy it outright - of £20,000
• The GFV at the end of a three-year PCP plan is £12,000 - £8,000 less than its list price
• This difference is what you pay over the course of your PCP
• You have a £2,000 deposit, which leaves £6,000 to pay over the three years
• This equals a monthly payment of £166.66
• At the end of your PCP, you’ll need to pay a lump sum of £12,000 to keep the car

But remember, there’s interest payable, too

The example we’ve just given serves to give you an impression of how PCP works, but it’s a little too simple as it doesn’t account for the interest you’ll pay, what with a PCP agreement being a loan and all. In reality, your monthly payments will be made up of your payment towards the cost of your car, and interest. What interest rate you’ll be charged depends on what’s on offer from the dealer and their finance partner, and your circumstances, too. If you can put down a bigger deposit, this will reduce the amount of money you need to borrow through the PCP, and will keep the amount you pay in interest to a minimum.

As with any purchase, shop around and get a few examples of PCP agreements to compare. Make sure you look at everything and check that it’s as good a deal as it seems. A low deposit may seem like a great idea, but it means you’ll be borrowing – and paying interest – on a higher amount, and could end up paying more in the long run than if you’d put down a bigger deposit.

And, you’re liable for the full cost of the car

Although PCPs are a pretty flexible finance arrangement, you’ll always be liable for the full cost of the car throughout the agreement. This means that if something happens, such as if you’re in an accident and the car is written off, then you still have a duty to repay the amount you borrowed on the PCP. Your insurance will help with this, but you may find that because of depreciation, they won’t cover the full cost of the car. It may be worth investigating gap insurance, which is designed to cover the difference between what your insurer will give you and what you need to satisfy your finance agreement or to replace your car.

Can you haggle on the cost of PCP car finance?

We can’t promise that you’ll definitely be able to haggle over the price of your PCP with the dealer. Many dealerships these days have their prices set at head office level, which gives individual salespeople no room to negotiate with you. But, if you don’t ask, you won’t get, so it’s always worth a try.

Rather than trying to get them to reduce the overall cost of the plan, try getting them to include more within it. For example, if your PCP requires that you get your car serviced once every 12 months, try to get the dealer to include the cost of this in your plan. You might also be able to negotiate with them on the interest rate you’ll pay. This is trickier as it’ll be set by the finance provider rather than the dealer themselves, and you only have a leg to stand on trying to haggle the interest rate down if you have an excellent credit history.

What happens at the end of a PCP?

When your PCP plan comes to an end, then you have three options.

1. Pay the lump sum to buy the car, and it’s yours
2. Hand the car back over to the dealer, and walk away with nothing else to pay
3. Use the car in part-exchange to start over with a new PCP plan on another car

Remember the Guaranteed Future Value (GFV) that we talked about earlier? This is where it really comes into play, and can be a good thing, a bad thing, or neither.

If you don’t stick to the terms and conditions of your PCP, for example if you bring the car back with damage beyond acceptable wear and tear, or if you’ve exceeded the mileage cap that was part of your agreement, then this will impact the value of the car negatively.

If the value of the car is less than the GFV because you’ve broken the terms and conditions of your PCP, then you can expect the dealer to charge you for this. You can expect to have to pay to repair any damage beyond reasonable wear and tear, and will be charged a fee for any miles you’ve done outside of the limit laid out in your agreement. Fees for exceeding the agreed mileage can vary depending on the dealer, but will be outlined in your plan when you take it out. It goes without saying that this could get very expensive very quickly if you’ve gone over the cap by a lot. These fees are charged because the dealer will usually try to sell the car on themselves after you give it back, and if they can’t sell it for as much as originally planned, then they’ll want to claw some of the shortfall back from you.

If you’re planning to keep the car, then you’ll still have to pay the full GFV lump sum as it was laid out at the beginning of your PCP agreement. You might think this is no big deal, because you were always planning to keep the car and so you always planned to pay this amount. But, you will be paying more for the car than it’s worth.

So, whatever your plans at the end of the PCP agreement, a car that’s worth less than its GFV isn’t a good thing for you.

What if the car’s worth more than its GFV?

On the other hand, you might be handing the car back in a better condition than the dealer expected, for example, with less miles on the clock than you could have had. This could mean that the car is actually worth more than the GFV, and this is a good thing!

If you’re planning to keep the car, then you’ll only ever have to pay the GFV lump sum, even though the car is worth more than that. So you’ll be getting a pretty good deal. This also puts you in a good position if you then wanted to sell the car on privately, as you could make more from it than you’ll have just paid.

If you’re handing the car back and walking away, then the car being worth more than anticipated probably isn’t going to help you much. After all, the dealer isn’t going to give you the extra cash! But, at least you won’t have any fees to pay for going over the mileage or returning the car in bad condition.

If your plan is to start over with a new PCP though, then you can benefit from the car you’re handing back being worth more. When you do this, you won’t have to pay the lump sum on your existing agreement, as you’re giving the car back. Any amount the car is worth over and above the GFV will go towards the deposit on a new finance scheme. This means you can put down a bigger deposit on your new car, reducing your monthly payments.

What happens if you want, or need, to end a PCP early?

If you’ve come into some money and decide to pay off your PCP early, then this can be done, but it may not work in your favour. In part, this is because there will likely be a clause in your PCP agreement that limits how soon you can pay off your finance, and you may not be able to pay it off as soon as you would have liked.

PCP agreements are designed to work out neatly when run for the full term of the contract, so that when you reach the end of the agreement, the amount you pay for the car is what it’s worth. Cars lose their value over time, but this depreciation happens most quickly at the beginning. If you settle a PCP plan early, you could end up forking out more to clear your remaining monthly payments and the GFV payment than the car is worth at that moment in time.

The other way you can get out of a PCP plan early is through Voluntary Termination. This option should only be used if you’re struggling to make the payments on your PCP, and is available to you once you’ve paid off at least half of the total amount payable. Voluntary Termination gives you the right to give the car back to the dealer without having to pay anything else. Because of the way PCP plans are structured, with a deposit, low monthly payments, and a large payment to be made at the end, chances are you won’t be eligible for Voluntary Termination until you’re in the last few months of your agreement. So, if you find yourself in financial difficulty soon after taking out a PCP, this option is unlikely to be of any use to you.

Ending a PCP early by using Voluntary Termination won’t affect your credit score as you’re simply exercising your legal right to end your agreement. The finance provider can add a note to your credit report saying that the agreement was settled this way, and other lenders you might apply to in the future will be able to see this note. But, they won’t be able to see why you terminated the agreement, so they won’t know if it was because you were experiencing financial difficulty at that time, or because of something else.

What happens if you can’t keep up with the payments on a PCP?

PCP car finance is a type of secured loan – the kind of loan where you secure your borrowing against an asset. Because this is car finance, the loan is secured against your car. This means that if you can’t use Voluntary Termination to end your PCP early, and you fall behind on your payments, then the finance provider could repossess your car to recover what you owe them.

How does PCP compare to other types of car finance?

PCP is a sort of best of both worlds when it comes to car finance. It comes with the flexibility to be able to buy the car at the end if you want to, but you’re under no obligation to if you’d rather swap it for something else or hand it back and walk away at the end of your plan. But, its limitations, like capping your mileage, don’t work for everyone, and some people prefer to swerve a PCP arrangement because of that. Check out our guides to Personal Contract Hire and Hire Purchase to make sure you’re fully informed about all the options available before you make a choice.