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Cheap personal contract purchase
How to find the best deal for you
If you need a new car, but don't have the cash to pay for it, then car finance could be a way to get behind the wheel of one – though it's a big commitment. Here we've broken down the basics of personal contract purchase (PCP) so you can work out whether it's right for you.
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What is personal contract purchase?
Personal contract purchase (PCP) 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 pay a much larger final payment).
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 about 10% of the car's price). Do note that 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. The larger the deposit, the less you'll have to borrow.
- The amount you borrow. You borrow the value of the car from the finance company, minus the deposit. However, your repayments aren't designed to pay all of this amount off.
Your repayments will cover the difference between the amount you've borrowed, and the amount the finance company sets as the 'balloon payment' (a large final payment you pay if you want to keep the car – see the next part). You'll pay this amount off during the deal, plus interest. So you're not paying off the full value of the car.
Your monthly payment is then this amount divided by the term of the deal (usually 24 or 36 months) minus the deposit you've put down. Typical interest rates start from about 4%, though some dealers may offer 0% interest. Be wary of these as they are likely to try to recoup their losses somewhere else by, for example, inflating the balloon payment.
Here you can sort your own finance from an online broker or lender, or you can use a finance company that works with your chosen dealership.
Whichever you choose, the finance company will pay the dealer the full amount for the car (less your deposit). You will then make your payments to the finance company during the term, and it will own the car (you will be the registered keeper).
- The balloon payment (a large final payment you pay IF you want to own the car). Also referred to as the guaranteed future value, this is how much the finance company expects your car to be worth after your finance deal ends, 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.
The finance company (not the dealership) will contact you towards the end of your deal to ask whether you'll pay the balloon payment, hand the car back, or – if the car's worth more than the agreed balloon payment – whether you want to trade it in and use the extra as a deposit for a new deal.
OK, so this might sound a bit complicated so here's an example to explain it:
- You agree to purchase a car for £20,000 over three years and the finance company calculates the car will be worth at least £8,000 at the end.
- You pay a 10% deposit (£2,000) with a loan for the rest (£18,000).
- You then owe £18,000. Though as it's been agreed that the car will be worth £8,000 at the end, you only need to repay £10,000 (plus the interest on the entire £18,000) over the three-year period.
- At the end of the agreement, you pay the final £8,000 to keep the car or choose to hand the car back/take out a new PCP deal.
Importantly, even if you hand the car back, you will still have paid interest on the full loan amount (£18,000) over the three-year period, and the finance company remains the owner throughout the term of the PCP agreement.
You may be able to find no-deposit deals, but these are usually rarer. Often car finance deals will give a fixed rate of interest on them – ignore this, you're looking for the annual percentage rate, or 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.
Alternative types of car finance to consider
This guide focuses on personal contract purchase (PCP), though before you go on, do check these alternative types of car finance to assess if they'd suit you better.
Broadly speaking, there are six different ways to pay for a car. The table has the key differences at a glance, before we run through the alternatives to PCP in more detail.
|Finance type||Typical length of agreement?||Initial deposit required?||Who owns the car?||Mileage restrictions?|
|None – cash savings||N/A||N/A||You||No|
|0% credit card||Up to 25 months||No||You (though you'll still need to repay the debt)||No|
|Personal loan||Usually 1-7 years||No||You (though you'll still need to repay the debt)||No|
|Personal contract purchase||Usually 1-5 years||Yes (i)||The finance company, unless an optional final balloon payment is made||Yes (ii)|
|Hire purchase||Usually 1-5 years||Yes (i)||The finance company, until the final repayment is made, then you||No|
|Leasing/personal contract hire||Usually 1-4 years||Yes (i)||The finance company, at all times||Yes (ii)|
Sadly, there's no 'one-size-fits-all' answer to which wins (as much hangs on whether you want to own the car and other factors). However, we've included more information on each alternative to PCP below, to help work out which is right for you.
- Cash savings – the cheapest option for most cars
The clear winner if you want to own the car fully from day one, as you'll avoid paying any interest or taking out debt. Though if you're looking to buy a brand new car – which on average loses about 40% of its value by the end of the first year – and are likely to change it in the next few years, it's worth considering a leasing or personal contract purchase deal below. With these, the overall cost of ownership can work out cheaper.
- 0% spending credit card – no interest if you can get a big enough credit limit (and the dealer accepts cards)
Depending on the price of your new car, a 0% spending credit card could be the next cheapest way to borrow. Like paying in cash, you'll own the car outright, plus you'd be covered by Section 75 protection. However, you'd need to check whether the car dealer accepts payment by credit card, as not all do.
Unfortunately you usually won't know what credit limit you'll get before applying, and you should budget to pay the debt off before the 0% period ends, as the interest rate rockets after then. The longest cards typically offer up to 25 months at 0% interest – see our 0% spending cards guide for more information.
- Personal loan – usually cheapest if you need to borrow and want to own the car outright
This usually allows you to borrow higher amounts than a 0% credit card would offer, though you'll pay interest. However, repayments will be structured to clear the debt at the end of the term, which is usually between one and five years.
Once approved you'll receive the funds into your bank account, which you can then use to buy the car, so you'll own it outright. See our Cheap loans guide for best buys and full help.
- Hire purchase (HP) – an option to consider if you're struggling to get a cheaper loan, though the lender owns the car until you fully repay
This works in a similar way to a loan – as you're borrowing and paying off the full cost of the car – though here you won't own it until you've made the final payment. Instead the car is owned by the finance company as it uses it as security against the loan (like a mortgage), so if you fail to pay, it can seize the car.
This can mean HP is easier to get than normal loans, though you'll usually need to pay a deposit (often 10% or more of the car's price). You'll therefore need to consider how to fund that. However, if you're buying a brand new car from a dealer, it's worth checking if it offers a promotional contribution towards this.
As the dealer will be making money from the finance deal, you may find it offers larger discounts or contributions to the deposit on new cars. For used cars, it may mean you can haggle more off the sale price. Always be careful and make sure to calculate the total cost you'll need to repay after all interest has been added. This will then show the 'true' value of the discount. See our full Cheap hire purchase guide for more information.
- Car leasing/personal contract hire – low monthly rental payments, but you'll never own the car (nor have the option to)
This is a way to get a brand new car for a monthly payment, though this is essentially a long-term rental, so you'll never own the car – nor have the option to buy it. Instead you'll pay an initial deposit followed by a monthly amount for the duration of the contract, which is usually over one to four years.
As with PCP, you'll need to choose a mileage allowance (for example, 8,000 miles a year) and you're responsible for the car's upkeep. At the end of the agreement, you simply return the vehicle (though you could be charged if you've exceeded the mileage or damaged it). See our Cheap car leasing guide for full help.
Personal contract purchase need-to-knows
If you think personal contract purchase (PCP) is right for you, here are the need-to-knows to understand before opting for a new agreement.
Dealers calculate the balloon payment 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 – for example, a car will usually be worth less after three years than two.
- Your agreed annual mileage – for example, a car with 40,000 miles on the clock after three years will be worth less than one with 20,000.
Car finance companies often use specialist car valuers such as Cap HPI, Parkers and Glass's Guide to help predict what a car's future value will be, by looking at previous depreciation of similar car makes and models.
Finally, the finance company can apply its own risk assessment on top, so balloon payments vary between finance providers.
2. Though you won't own the car, you're usually responsible for insurance, parking/speeding tickets and general upkeep
The finance company remains the legal owner during the PCP agreement, but you're recorded as the registered keeper – so you'll be responsible for any parking or speeding tickets, servicing costs and insuring the car. So you'll need to factor these costs in on top of your monthly payment.
Dealers will sometimes throw in service and maintenance packages, warranties and insurance, though always check these are free, or represent good value. See our Cheap car insurance guide for full help in cutting insurance costs.
At the end of your agreement you usually have three options:
1. Buy and keep 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 covers admin costs to transfer the car. It can be up to £500 but is usually lower: about £100 is standard.
2. Trade in your car to get a new deal. This is a common option, but there are two different ways this can work:
- Trading your car and starting a new deal with the same dealer/finance company. 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 was £9,000 and the balloon payment £8,000, you'd have the difference of £1,000 that you could use as a deposit to roll into another deal.
- Trading your car to get a new deal with a different dealer/finance company. If you have a PCP agreement with a certain manufacturer's finance arm (for example, BMW Finance) then you'd usually only be able to trade your car in for another one within its range. So a BMW for another BMW, for example.
If you want to switch brands, you'd typically need to pay the balloon payment so you own the car. You can then trade it in with the new dealership as the owner of the car. If you can't afford the balloon payment, you'll need to stick with the same dealer to get a new deal, or hand the car back to the finance company, as below.
3. Hand the car back and walk away. If the car is worth less than the balloon payment – that is, if it's lost more value than was expected at the start of the deal – the sensible course is just to hand the car back as the finance company takes the hit.
If the opposite is true, so the car is worth more than the balloon payment, unfortunately you can't take the extra as cash. You'd need to buy the car and then sell it privately or trade in as above, or get agreement from the finance company to sell it and then pay off the finance.
Whether you're trading your car in or handing it back and walking away, you could face additional charges. The finance provider will usually appoint someone to inspect the car when it's returned to advise if anything further is owed:
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 its future value. A car that's done 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 can charge for every mile you are over, often by about 10p a mile. Be careful as this can soon tot up – for example, at that price, an extra 1,000 miles would cost you £100.
- 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 saleable condition, which means you'll likely be asked to pay to put right any large scratches or damage anywhere on the car.
You can avoid these charges by agreeing a sensible mileage and taking good care of the car. Always request a copy of the dealer or finance company's fair wear and tear policy at the start of the agreement, so you know what fees to expect. 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.
To get out of the contract early there are a couple of options:
Under the Credit Consumer Act of 1974, you can legally terminate your contract if you’ve paid over 50% of the total cost of the loan, including interest and the final balloon payment.
Car finance companies won’t usually like this as they will often be taking back a car worth less than the remaining payments, so be aware that a voluntary termination of your contract might not be made easy for you. They may try to convince you to try other financing options, and it might take longer to process than you’d hoped.
You’ll still need to pay charges once the contract has been terminated. These include admin fees, such as a fee for collecting the vehicle, as well as charges for any damages or excessive mileage.
A voluntary termination will show up on your credit file, although it shouldn’t affect your credit score as much as clinging to a contract you can’t afford and missing out on payments.
Also note that a voluntary termination differs from a voluntary surrender, in which less than 50% of the loan has been repaid. The finance company will take the car but you’ll still have to pay the remaining balance of the contract.
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 what 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'd 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.
When you apply, the lender will normally do a credit check to decide whether to lend to you, and this check will appear on your credit file as an application for credit.
Credit checks for HP 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, the lender can just come and repossess the car, whereas for loans there's no security, so it'd need to chase you through the courts.
If you find you're not able to make repayments, always contact the lender – ideally before the next payment is due. If it knows you're struggling, it should help you by offering an alternative and affordable repayment plan.
If you miss a payment, it's likely the lender will contact you to see what's wrong. If you keep missing payments, it'll mark you as in 'default'. Once this happens, it'll usually take back the car quite quickly, as to leave the vehicle with you while it chases payments risks the car's value depreciating even more.
As well as the company 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.
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, it's worth getting quotes from online brokers first, so you can compare with the dealer's offer. It's also worth taking a copy of the cheapest quote along so you can ask it to match or beat it.
Important. Spending £100-£30,000? Pay just a penny on a credit card for purchase protection
Pay something towards your car on a credit card, and you get powerful extra protection if something goes wrong down the line. This is because you're then covered by Section 75 laws.
Provided that the total cost of the car you're buying is between £100 and £30,000, paying anything towards it by credit card means the card company (or finance company in some cases) is equally liable along with the dealer if things go wrong.
However, this isn't always straightforward. Some dealers don't accept credit cards and some may only allow you to pay a limited amount by card. So figure out how important this is, and ask your chosen dealer if it can accept cards before deciding how to pay.
Personal contract purchase (PCP) deals can be found from a handful of lenders and 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.
Some 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.
Important. Beware of 'representative' APR – you could get a MUCH higher rate. Only 51% of successful applicants have to get the advertised interest rate, so up to 49% could get a more expensive PCP deal than the one they applied for (if they're accepted at all). So you could apply for 6.5%, be accepted, and be given a 17.9% APR. Unfortunately the only way to know the rate you'll get is to apply, though always use the lender's eligibility calculator to see your acceptance odds first.
|Provider||Rep APR interest (1-4 years or stated)|
|Try a car finance comparison. This scans five lenders and shows your acceptance odds before applying, without any impact to your credit report.|
|Cheapest existing-customer deals. If you've had its current account for at least three months. Cars need to be under seven years old at the end of the agreement.|
|Bank of Scotland / Lloyds Bank||
|Top 'open to all' deals. All providers here have eligibility calculators allowing you to check your acceptance odds before applying – typically for cars up to 10 years old at the end of the agreement.|
|Flow Car Finance*||8.9% (1-5 years)|
|CarMoney||8.9% (1-5 years)|
|Zuto*||19.3% (1-5 years)|
- Getting a PCP deal 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 from about 4%, 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 often more expensive than a personal car loan or hire purchase.
- Getting a PCP deal through an independent dealership or car supermarket
Many independent dealerships and car supermarkets get their finance from big banks' consumer arms, allowing them to offer the same range of deals as the manufacturer-tied dealers. Black Horse (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 often can't offer the heavily subsidised 0% finance or deposit contributions that the car companies' finance arms can. 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.
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Want to complain about your car finance provider?
If you think your car finance agreement was mis-sold to you, see our dedicated guide on how to reclaim car finance.
Alternatively, you can also complain if your car finance provider has taken the wrong amount in payment, treated you unfairly or its service has been atrocious. It's always worth trying to call the lender first to see if it can help, but if not...
Personal contract purchase FAQs
Can I only use PCP to finance a new car?
No. If you've found a car that's a couple of years old you can usually finance it with PCP. However, interest rates tend to be less competitive. This is because cars have largely lost a big chunk of their value, meaning there's little chance of the dealer getting much back on the car.
Therefore, the interest is the only place dealers can make money from a PCP deal on a used car.
How can I make repayments as low as possible?
Don't overstretch yourself, so go for a cheaper car if the repayments are too high. Alternatively you can pay a bigger deposit, and spread repayments out over a longer period.
You're financing the depreciation of the car, so choosing one that holds its value well is another opportunity. Also, pay attention to the annual mileage you set – the lower this is, the lower the repayments will be (though don't set it low if you won't stick to it, as over-mileage charges can be hefty).
Why do dealers offer PCP deals?
These deals are big business for dealers and represent a popular way for people to buy new cars.
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, with the seller earning interest each time.
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 makes it easy to sell on (or the dealer will charge big penalties), so it's a win-win for it. Plus the lower monthly payments mean that more of its customers can afford more of its cars.
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 that pays out an amount above this, 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 – on average new cars lose 60% of their value within three years.
It's not mandatory, so you need to decide if it's worth it. Always compare policies as those sold by dealerships tend to be expensive. See our guide to gap insurance for full info and cheap providers.
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