What Is PCP?

How does PCP work?

A PCP deal has three parts:

• a deposit or part exchange
• monthly payments over a fixed term, usually three to five years
• an optional final payment if you want to keep the car

When the agreement starts, the finance company estimates what the car will be worth at the end. That estimate sets the optional final payment, and your monthly payments mainly cover the difference between the car's price and that future value, plus interest. This is why the monthly figure can look lower than on other finance.

At the end, you usually choose one of three options:

1. Hand the car back and walk away, subject to the mileage and condition rules.
2. Part exchange it, using any equity (the car's value above the final payment) towards another car.
3. Pay the optional final payment and keep the car.

That choice is a big part of PCP's appeal. It sits somewhere between leasing and buying.

What is the balloon payment?

The balloon payment is the optional final payment, sometimes called the guaranteed minimum future value. It is usually the biggest single amount in the agreement.

You do not have to pay it if you hand the car back. But if you expect to keep the car, it is a major part of the cost and should be planned for from day one. Choosing a car on the monthly figure alone is the most common way people end up surprised later.

What is the Total Amount Payable?

The Total Amount Payable is everything you would pay if you kept the car: the deposit, all the monthly payments, the optional final payment and any fees. It is shown on your agreement and is the best single figure for comparing deals.

Here is an illustrative example. The figures are made up to show the method and are not typical prices:

• Cash price of the car: £22,000
• Deposit: £2,500
• 36 monthly payments of £285: £10,260
• Optional final payment: £11,200
• Option-to-purchase fee: £10

Total Amount Payable: £2,500 + £10,260 + £11,200 + £10 = £23,970. The difference from the cash price, £1,970, is what the credit costs you if you keep the car.

Can you end a PCP early?

PCP agreements regulated by the Consumer Credit Act 1974 usually give you two routes to end the agreement early.

• Voluntary termination. Section 99 lets you end a regulated hire-purchase or conditional sale agreement by giving notice before the final payment falls due. Under section 100 you then owe the amount needed to bring what you have paid up to half of the total price, unless the agreement asks for less, plus any arrears and possibly the cost of damage beyond reasonable care.
• Settlement. You pay off the finance using the lender's settlement figure, then own the car and can sell it.

In the example above, half the Total Amount Payable is £11,985. After the £2,500 deposit, the 34th monthly payment takes the total paid to £12,190, which passes the halfway point. After 33 payments, £11,905 has been paid, just short of it. The PCP hand-back calculator works this out from your own agreement.

PCP vs leasing

PCP and leasing can look similar because both often have lower monthly payments than buying. The aim is different.

With leasing (personal contract hire), you pay to use the car and hand it back; there is normally no option to buy it. With PCP, you have a finance agreement that gives you the option to own the car at the end. The lease vs PCP comparison sets the two side by side.

PCP vs hire purchase

Hire purchase is more straightforward. You pay a deposit and monthly payments, and you own the car once the last payment, including any option-to-purchase fee, has been made.

PCP usually has lower monthly payments, but you need the large final payment to own the car. HP is simpler and ownership-focused. PCP is more flexible, but also easier to misunderstand.

What should you check before taking PCP?

Before signing, check:

• the deposit
• the monthly payment
• the APR
• the Total Amount Payable
• the optional final payment
• the mileage allowance and the excess mileage charge
• the condition standard for handing the car back
• what happens if your circumstances change, including early settlement and voluntary termination

The practical question is not just "can I afford the monthly figure?" but "does this still make sense once I include the deposit, the final payment and the other running costs?" The Total Car Cost Calculator adds those up.

Who is PCP good for?

PCP can suit you if you:

• want lower monthly payments than HP might offer
• like having options at the end
• may want to keep the car, but are not sure yet
• drive a fairly predictable mileage
• want a newer car without paying the full price upfront

Who is PCP less suited to?

PCP may be less suitable if you:

• want the simplest route to ownership
• do not want a large final payment hanging over the agreement
• are judging the deal on the monthly figure without looking at the total cost
• find your mileage hard to predict

The bottom line

PCP is not good or bad by default. It works best when you understand what you are paying for: the deposit, the monthly payments, the final payment and the conditions at the end. If you like flexibility and want the option to own the car later, it can make sense. If you only focus on the monthly payment, it is easy to stretch for a car that costs more than you realise.