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1 August 2021
Cheap Personal Contract Purchase
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.
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:
Ok, so this might sound a bit complicated so here's an example to explain how it works.
Importantly, even if you hand the car back, you will still have paid interest for 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 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.
This guide focuses on 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.
|None – cash savings||N/A||N/A||You||No|
|0% credit card||Up to 21 months||No||You (though you'll still need to repay the debt)||No|
|Personal loan||1-7 years||No||You (though you'll still need to repay the debt)||No|
|Personal Contract Purchase||1-5 years||Yes (i)||The finance company, unless an optional final balloon payment is made||Yes|
|Hire purchase||1-5 years||Yes (i)||The finance company, until the final repayment is made, then you||No|
|Leasing/Personal Contract Hire||1-4 years||Yes (i)||The finance company, at all times||Yes|
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.
If you think PCP is right for you, here are our key 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:
Car finance companies often use specialist car valuers such as CAP, 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.
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, around £100 is standard.
2a. Trade in your car to get a new deal (with the same dealer). 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 is £8,000, you’d have the difference of £1,000 that you could use as a deposit to roll into another deal.
2b. Trade in your car to get a new deal (with a different dealer). If you have a PCP agreement with a certain manufacturer's finance arm (eg, BMW Finance) then you'd usually only be able to trade your car in for another 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 it. You can then trade it in with the new dealership as the owner of the new car.
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, sadly 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 around 10p per mile. Be careful as this can soon tot up. For example, at that price, an extra 1,000 miles would cost you £100.
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.
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'll 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 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.
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, they'll mark you as in default. Once this happens, they'll usually take back the car quite quickly, 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 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.
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.
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.
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 rate, so up to 49% could get a more expensive PCP deal than the one applied for (if accepted at all). So you could apply for 4.2%, be accepted, and given a 17.9% APR. Sadly 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.
|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||
|Top 'open to all' deals. All have eligibility calculators to check acceptance odds before applying – typically for cars up to ten years old at the end of the agreement.|
|Flow Car Finance*||6.9% (1-5 years)|
|CarMoney||8.9% (1-5 years)|
|Zuto*||19.9% (1-5 years)|
If your car finance provider has taken the wrong amount in payment, treated you unfairly or its service has been atrocious, then you don't have to suffer in silence. It's always worth trying to call the lender first to see if it can help, but if not...
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 large 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.
Don't overstretch yourself, so go for 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 (though don’t set it low if you won’t stick to it, as over-mileage charges can be hefty).
These deals are big business for dealers and represent a popular way for people buying 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 it 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 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.
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 - 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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