What is PCP finance?

If you are thinking of buying a new car, hire purchase and personal loans are not your only choices. An increasingly popular way to drive a new car is by using Personal Contract Purchase - or PCP for short. To help you decide if PCP is right for you, we\'ve put together a simple guide to how this type of finance works and why it could benefit you. Keep reading to find out more.

What is PCP finance?

Personal Contract Purchase has grown in popularity over recent years as it offers many advantages over traditional loans or hire purchase. Under a PCP agreement, you choose the car, how much deposit you want to put down, how long you want the contract to run for and the mileage you intend to do. In return, you pay a fixed monthly amount for the term of the contract. At the end of the contract you can either:

buy the car outright for an agreed lump sum, or
hand the vehicle back to the PCP company and walk away with no further obligation
Why is it a cheaper option than other types of car finance?

When you buy a new car under a PCP the seller will give you an optional payment on the car at the end of the agreement (often called a \'balloon payment\'). This is the guaranteed amount that your car will be worth at the end of the PCP agreement. The optional payment plus any deposit you have made will be deducted from the cash price of the new car. Then, your monthly payments will be calculated based on the outstanding balance, plus interest. In effect, you only finance the depreciation of the new car. Your monthly repayments are cheaper than under a hire purchase agreement because you are deferring part of the total cost of the car (the balloon payment) until the end of the contract. And, if the car ends up being worth more than the \'optional payment\' you can often use the extra money as a deposit on a new car and start the process again.

What are my options at the end of the contract?

At the end of a PCP agreement you normally have four different options:

Pay the balloon payment and keep the car
Return the car to the finance company. If the car is in good condition and you have not exceeded your total mileage you can typically walk away with nothing extra to pay
Use your car as a part exchange and start a new contract. As long as the trade in value is higher than the \'optional payment\' the difference can be used towards a deposit for your next contract
Prior to the end of your PCP agreement you can apply to the lender to sell the car privately. You can keep any profit over and above the \'optional payment\'.
Are there any additional costs to pay?

There are two common reasons why you may have additional costs at the end of your PCP agreement. When you agree a PCP contract, you decide the total mileage for the period of the contract. The \'optional payment\' will be determined in part by this mileage. When you hand the car back, if you have exceeded the mileage limit you will be charged a fixed amount for every mile over the agreed limit. Bear in mind that if you are keeping the car and you want to pay the balloon payment there is no penalty for going over the mileage limit. Secondly, when you buy a car using PCP you agree to hand the vehicle back in good condition. The finance company will accept normal wear and tear but if the car is in poor condition you may face additional charges. The better condition your car is in, the more money it will be worth. So, it is definitely in your own interest to keep the car in good condition as this will increase your chances of the car being worth more than the \'optional payment\' at the end of the contract. PCP finance explained at Sandicliffe