Cheap Personal Contract Purchase

Personal Contract PurchaseQ&A

• Can I only use a PCP to finance a new car?

  No. If you’ve found a car that's a couple of years old you can finance it with PCP. However, interest rates tend to be less competitive. This is because cars have probably already lost a large chunk of their value, meaning there's little chance of the dealer getting much back on the car.

  Therefore, the interest's the only place dealers can make money from a PCP deal on a used car.

• How much will I pay over the course of the deal?

  You’ll pay a deposit at the outset. You may be able to find no-deposit deals, but these aren’t commonplace. The interest rate (APR) you’ll pay should be fixed and clearly displayed on any agreement.

  Often car finance deals will give a fixed rate of interest on them – ignore this, you’re looking for the APR as this includes all interest and charges. Legally, the APR has to be stated so look for it, and ask if you can’t find it.

  Most finance companies charge an arrangement fee and a purchase fee if you buy the car at the end - these should be around £100-£500, depending on the car.

• How can I make repayments as low as possible?

  You can pay a bigger deposit, and spread repayments out over a longer period.

  You’re financing the depreciation of the car, so picking one that holds its value is another ploy. Also, pay attention to the annual mileage you set – the lower this is, the lower the repayments (though don’t set it low if you won’t stick to it, as over-mileage charges can be hefty).

  Having said all that, the best way to get cheaper repayments is to choose a cheaper car.

• Can I settle my PCP early?

  Usually, yes, but you may have to pay extra. Remember that the finance company only guarantees the value of the car at the end of the agreement. So if you want to sell your car two years into a four-year deal, you’ll have to pay the difference between it’s worth and what you still owe.

  Say, for example, at the point you want to repay your car is worth £15,000 but your finance settlement figure is £17,000 - you will have to pay the extra £2,000 to the dealer to clear your 'negative equity' before you can get out of the deal.

  Some finance providers will charge you an extra fee on top to settle early, some won’t. Check the fine print before you sign up if you think you’ll want to do this.

• Are there any other costs I should know about?

  If you choose to purchase the vehicle at the end of the contact you’ll also pay an 'option to purchase' fee, typically around £150, on top of the balloon payment. This is to transfer ownership of the car from the finance company to the customer.

  However, the dealer cannot ask you for more money than the GMFV if you're buying the car. Likewise, if you return the car it can’t ask you for any more money. The exceptions are if you're over the mileage limit, or there's damage to the car. You'll be expected to pay to put this right.

• Why do dealers offer PCP deals?

  These deals are big business for dealers. A massive 73% of new cars in 2014 were bought using PCP, making it the most common way for people buying new cars to finance them. More than half a million new cars and 10,000s of used cars are bought this way each year.

  The final balloon payment means that customers will probably buy another car on PCP rather than pay a big chunk of cash to own the car. So a customer could be visiting the same dealer for decades swapping one car for another, and lining their pockets with hefty interest payments and premiums to buy the car itself.

  You don’t have to visit the same dealer – but many buyers will, particularly if they always buy the same make of car.

  The dealer is also guaranteed to get the car back in a condition that it can easily sell on (or it’ll charge big penalties if it doesn’t), so it’s win-win for the dealer. Plus the lower monthly payments mean that more of its customers can afford more of its cars.

• Will I be credit scored?

  When you apply, the lender will do a credit check to decide whether to lend to you, and this check will appear on your file as an application for credit.

  Credit checks for PCP aren't usually as stringent as those for personal loans. This is because all car finance is secured on the car - if you don't pay, they can just come and repossess the car, whereas for loans there's no security, so they'd need to chase you through the courts.

  Pay the finance off on time each month, and it'll help your credit record. Fail to pay on time, and you'll be marked as in default, which could affect your ability to get a mortgage or other credit. See our Credit Scores guide for more info.

• What happens to my credit rating (and the car) if I miss payments?

  If you miss a payment, it's likely the lender will contact you to see if you just 'forgot'. If you keep missing payments, they'll mark you as in default. Once this happens, they'll quite quickly take the car, as to leave it with you while they chase payments risks the car depreciating in value.

  As well as taking the car, if you fail to keep up repayments, you'd get a default mark on your credit file, which could affect your ability to get a mortgage or other credit. See our Credit Scores guide for more info.

• I've heard about gap insurance that'll protect me in case I write the car off. Do I need it?

  There are three main types of gap insurance policies, but they all have the same general aim. If you have a crash, or your car's stolen, your insurer will usually only pay out the amount the car is worth at that time.

  Gap insurance is a policy you can buy which pays out an amount above this, either to get you back to the original sale price of the car, to the amount you have outstanding on finance (which can, at times, be greater than the car's worth), or to the amount it would cost to buy the car new now.

  It’s offered because cars depreciate really quickly. The AA calculates that on average new cars lose 60% of their value within three years.

  However, watch out for dealers offering you gap. Since September 2015, they haven't been allowed to sell gap insurance to you at the same time as your finance deal (they need to wait a week). But it's best to steer clear of getting gap insurance from your dealer anyway. The policies they sell tend to be quite expensive, and are easily beaten by standalone providers - if you think getting gap insurance is worth it. It's not a necessity, and many think it's not worth the paper it's written on.

  If you do decide you want it, steer clear of buying it from the same place you get car finance, as it's expensive. Stand-alone providers can offer the same cover much more cheaply. See buying a new car for more on gap insurance and where to find a policy.