Cheap Personal Contract Purchase
How to find the best deal for you
If you like to change your car regularly but want low monthly payments to fit your budget, personal contract purchase could be the answer. The name might sound like some arcane law, but this flexible deal could save you a lot of hassle.
Here’s a guide to break down the basics, and work out whether personal contract purchase - or PCP for short - is the right car finance deal for you.
This is the first incarnation of this guide. Please suggest any changes or questions in the PCP discussion.
In this guide...
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What is personal contract purchase?
A PCP deal is basically a loan to help you get a car. But unlike a normal personal loan, you won’t be paying off the full value of the car and you won’t own it at the end of the deal (unless you choose to).
It’s one of the more complex financial products available to help you buy a car, but it can be broken down into three main parts:
- The deposit (usually around 10% of the car's price). Dealers offering PCP finance will typically want around 10% of the car as a deposit. Some car manufacturers' finance arms offer valuable ‘deposit contributions’ of £500-£2,000 or more if you're buying a new car but only if you take their finance - eg, VW Finance offers £1,000. The larger the deposit, the less you'll have to borrow.
- The amount you borrow. The amount you'll have to borrow is based on how much the finance company predicts the car will lose in value over the term of the deal (usually 24 or 36 months) minus the deposit you've put down. You’ll pay this amount off during the deal, plus interest. So you’re not paying off the full value of the car. Typical APRs are 4%-7%.
- The balloon payment (a balancing payment you pay IF you want to own the car). Also often referred to as the Guaranteed Minimum Future Value (GMFV), this is how much the dealer expects your car to be worth after your finance deal ends. It's agreed at the start of your deal. You don’t have to pay this, as you get a choice of what to do at the end of the deal. But it is the sum you’ll pay if you want to keep the car.
Be wary of 0% deals - they can be too good to be true. Some dealers offer 0%. Take these deals with a pinch of salt though, as they are likely to try to recoup their losses somewhere else by, for example, inflating the ballon payment or making the ticket price more expensive than if you would have bought the car outright (where they would have been more likely to offer you a 'discount' on the ticket price).
Ok, so this might sound a bit complicated so here's an example to explain how it works...
Let's imagine you sign up for a PCP over three years to buy a car with a ticket price of £18,000. You put down a deposit of £2,000 and the finance company calculates that the car will be worth at least £8,000 after three years. Here's how that would look...
To 'borrow' the car you pay...
Loan: £8,000 (£10,000-£2,000) plus interest
Total: £10,000 plus interest
To buy the car you pay...
Loan: £8,000 (£10,000-£2,000) plus interest
Balloon payment: £8,000
Total: £18,000 plus interest
We mentioned that you can buy the car at the end of the deal but you don't have to - in reality you have three options:
1. Buy the car by paying the balloon payment. Pay this then you'll own the car outright. Do note that most finance companies charge an added fee if you buy the car (this can be up to £500 but is usually lower).
2. Hand the car back and walk away. This means you have nothing more to pay (subject to damage, and over-mileage charges, see below for more info).
3. Get a new car. This is the most common option for people taking a PCP deal. Usually at the end of a PCP deal, the car will be worth slightly more than the balloon payment. And if this is the case, your dealer will usually ask if you want to use that 'equity' as a deposit on a new PCP deal on a brand new car. For example, if the car’s actual value at the end of the deal in the example above was £9,000 and the balloon payment is £8,000, you’d have the difference of £1,000 that you could use as a deposit to roll into another deal.
Usually people go for another PCP, but you don’t have to. Sadly, you can't take the extra as cash - unless you buy the car and then sell privately (or get agreement from the finance company to sell it & then pay off the finance)!
You don’t have to worry about the car being worth less than the balloon payment - that is if it's lost more value than was expected at the start of the deal. If that happens, the sensible course is just to hand the car back - the finance company takes the hit.
What charges could I face if I hand the car back/trade it in?
We mentioned that you could face charges if you hand the car back, whether that's trading it in, or just handing it back and walking away. There are two main types of charges, but both are avoidable:
Over-mileage charges. At the start of a PCP deal, you'll be asked to specify how far you'll drive the car each year. This is so the dealer can accurately assess the car's worth at the end of the deal to set the balloon payment. A car that's done a 10,000s of miles will be worth a lot less than a car that's only been used infrequently.
It's important to be as accurate as you can, as if you go over the agreed mileage limit, the finance company will charge 7p-10p for every mile you are over. Watch out for this, as 1,000 miles over will see you shelling out £100 at the end of the deal.
Damage charges. Just like when you rent a car, the finance company will check it for damage when you hand it back. Normal wear and tear is acceptable, but the car needs to be in a sale-able condition, which means you'll likely be asked to pay to put right any large scratches or dinks in the bodywork.
You can avoid these charges by agreeing a sensible mileage, and taking good care of the car. If there's damage, it's worth going to an approved service centre to see if it'll cost less to fix than the finance company will charge - it may be worth getting it fixed yourself.
The final way to avoid these charges is to buy the car - though that's not really MoneySaving!
Simply, dealers calculate this by predicting the value of the car after depreciation - the value the car loses over the contract term.
How much it will lose depends on several factors:
- The make and model you’re buying. Some lose value quicker than others.
- The length of the agreement, eg, a car will be worth less after three years than two.
- Your agreed annual mileage, eg, a car with 40,000 miles on the clock after three years will be worth less than one with 20,000.
However, car finance companies don’t work this out themselves. They use the expertise of CAP, Parkers or Glass's Guide (they're all specialists in car values) to help predict what the car might be worth by looking at previous depreciation of similar car makes and models.
Your agreed mileage also makes a difference to this. At the start of the deal, the dealer (or finance company agent) will ask you to predict how many miles you'll do each year.
This is a key part of working out the ballon payment, so you need to be honest. Understating miles will make payments cheaper during the deal but there'll be penalties to pay at the end if you hand the car back over the agreed mileage, which could be as high as 10p per mile. So, go over by 5,000 miles and you could be charged £500 for doing so at the end of the deal.
Finally, the finance company will apply its own risk assessment on top, so balloon payments vary between finance providers.
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Is PCP the right option for me?
If you want to change your car in a few years’ time, PCP could be a MoneySaving way to finance it.
These will cost more each month as you're borrowing and paying off more, but you will own the car without taking a big balloon-payment sized hit at the end. If you do opt to keep the car, PCP is generally more expensive than hire purchase.
Only 20% of people with a PCP deal actually buy the car. If you think you're in the 80% who won't buy it, it's worth looking at whether leasing may be a better option. You don't get the chance to own the car, but you also pay less each month. Essentially, you’re just renting the car for an agreed period, so it’s worth contrasting this cost against PCP.
Here are the pros and cons of PCP:
You get behind the wheel of a new car for lower monthly repayments than a personal loan or hire purchase.
You don’t need to worry about the future trade-in or resale value of the car, as the lender guarantees your car will be worth a minimum sum at the end of the deal.
It's flexible. You've several options at the end of it - you can even buy the car if you like.
Dealers will often throw in service and maintenance packages, warranties and insurance so you can get your total cost of motoring down to one payment each month (though check these are free, or if not, represent good value).
A PCP may let you buy a more expensive car than you might otherwise be able to afford but with monthly payments to suit your budget.
As PCP deals are usually only offered on new or nearly-new cars, you don’t have to worry about an old banger that’s likely to need a lot of repair.
You won’t own the car during the contract period (though this is the same for almost all dealer finance agreements) – and will only own it at the end if you pay the balloon payment.
If the predicted minimum future value is set very close to the actual value of the car you will have little equity to roll onto another deal. If there isn’t any, you will have to get your hands on a deposit for a replacement car elsewhere.
Extra charges of 7-10p per mile if you go over the agreed set mileage.
The future value is based on keeping the car in good condition. You’ll be charged extra to put right anything that’s not down to normal wear and tear.
Where can I get a PCP deal?
There are two main options here. The most common is to get the finance through the dealership you're buying from. However, before you start, there are some online brokers that have decent offers when you're looking for a PCP deal - and it's worth looking at these first so if you do go to a dealership, you know what's the cheapest elsewhere and can compare.
PCP deals can be found from a handful of online brokers. These are handy to get an idea of the prices and repayments you might be looking at on your ideal car. Brokers offer a wide range of deals, including those for buyers with a tarnished credit history. They simply supply the finance through a variety of lenders.
If you are asking for a quote from any of these brokers, check whether they will do a hard or soft search of your credit file to give you a quote. If it's a hard search, be wary, as this is fully visible on your credit file to other lenders as an application, even if you then don't take out the loan. Too many of these in a short space of time is a red flag, so think carefully.
Some of these brokers will also be able to source vehicles for you, as well as finance. But you can still get your car from any dealer in the UK, and just use the broker for the loan. Funds will be sent to the dealer after the finance agreement's signed. Here are a few of the larger brokers operating in the UK:
Financeacar.co.uk. The Financeacar.co.uk site is one of the easier car sites to use. It's a one-stop shop that allows you to select a car make and model, then the sort of finance you're looking for, then to configure the car, and finally get a quote for how much it will cost based on your credit record. Their deals are typically between 8% and 10% rep APR.
Carfinance247. One of the UK's biggest car finance brokers, Carfinance247* allows you to find a deal to suit almost any budget. The way it works is that you source a car from any UK dealer. Once you've done this, and know how much you need to borrow, you can get a quote from carfinance247 to see whether it can find a PCP deal for you, and at what rate.
It has different deals depending on your credit score, with rates starting from 5.8% APR (12.2% rep APR) and going up to 30% APR for people with a bad credit history. This is a high APR and you should see if you could get cheaper credit elsewhere, or find a different way to access a car before signing up to deals with such high interest costs.
Zuto. Broker site Zuto* allows anyone to apply for car finance with it, but is especially good if you'd find it difficult to get finance elsewhere, for example, the self-employed, or people with a poorer credit history.
The rate you'll get depends on how good your credit history is. If it's excellent, rates are available from 9.9% rep APR. But, poor credit scorers could end up being charged 34.3% APR. Again, like the above, this is a really high APR, so always check you can't get cheaper credit elsewhere, or find another way to get a car.
Carzu. If you want a broker to look after the process of finding a car, as well as getting the finance, try Carzu (you can also use it just for finance). APRs depend on how much you want to borrow, starting from 4.8% rep APR.
- Halifax Bank. Although not an online broker, Halifax offers a Flex Car Plan PCP deal, which provides a similar service, although it's only for its current account customers at the moment. As with the other financing methods here, Halifax will send the cash straight to the dealer you're buying from. This means it will therefore own the car until the end of the deal. Halifax has a 3.4% representative APR on its Flex Car plan.
Often known as forecourt finance, or just car finance, it's offered by almost every dealership in the UK - and PCP is one of the options they offer. Dealerships come in three main types: franchised (tied to one or more manufacturers, eg, BMW garages), independent (not tied) and car supermarkets.
Getting a PCP through the manufacturer's finance arm
In a franchised dealership, finance deals are usually arranged through the car finance arm of a manufacturer – so Ford Credit, for example, or Volvo Financial Services. It's definitely worth looking at what these dealerships can offer you on a finance deal, especially if you're buying a new car.
If this is the case, it's not uncommon for the manufacturer to give £500-£2,000 to you as a deposit contribution, and also offer 0% finance. If you don't qualify for 0% finance, you'll usually get an advertised APR offer of between 4% to 7%; though this is representative, so if you have a poorer credit history, you could be offered a much higher rate.
It's worth saying that if you know you want to own the car at the end of the deal, PCP will give you low monthly payments, but, once you include the balloon payment you need to pay at the end, PCP is almost always more expensive than a personal car loan or hire purchase.
Getting a PCP through an independent dealership or car supermarket
Many independent dealerships and car supermarkets get their finance from big banks' consumer arms, allowing them to be able to offer the same range of deals as the manufacturer-tied dealers. Blackhorse (part of Lloyds) and Santander Consumer Finance, for example, supply finance deals to non-franchised dealerships.
These finance providers aren't tied to manufacturers, and therefore can't offer the heavily subsidised 0% finance or deposit contributions that the car companies' finance arms can on their PCP deals. If you go to one of these dealerships, expect a representative APR of somewhere between 5% and 10% - or more if you've a bad credit record.
It’s a competitive market out there – check what’s available online and from dealers, and ask yourself what you can really afford. It’s vital you can afford the repayments before you commit. With all these types of finance, if your application is accepted, finance is sent directly to the dealer.
Personal Contract Purchase Q&A
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.
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.
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.
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.
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.
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.
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.
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.
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.