Cheap 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 the vehicle 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:

1. The deposit (usually about 10% of the car's price). Do note that some car manufacturers' finance arms offer valuable 'deposit contributions' of £500 to £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. 

2. 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 this whole amount off.
   
   Rather you'll pay off the amount you've borrowed, less the amount the finance company sets as the 'balloon payment' (a large payment you pay at the end of the deal if you want to keep the car – see the next part).
   
   Your monthly payment is this amount divided by the term of the deal (usually 24 or 36 months) minus the deposit you've put down, plus interest. 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.
   
   You can sort your own finance from an online lender or broker, 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).
   

3. The balloon payment (a large final payment you pay IF you want to own the car). Also referred to as the guaranteed future value (GMFV) or optional final payment, 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.

Personal Contract Purchase is one of the more complicated forms of car finance, so here's an example to explain it:

1. 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.

2. You pay a 10% deposit (£2,000) with a loan for the rest (£18,000).

3. 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. This is typically done in monthly instalments. 

4. If your PCP deal had an interest rate of, say, 7% APR, based on the amount you're borrowing and the length of the term, your monthly repayments would be about £350.

5. At the end of the agreement, you pay the final £8,000 if you want 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 have a fixed rate of interest attached – 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.

• 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 on 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 leasing or a Personal Contract Purchase deal. 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. You'll own the car outright (like paying in cash) 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. You can also read more about credit cards generally in the Credit cards and loans section of our website. 

• Personal loan – usually cheapest if you need to borrow and want to own the car outright
  
  This won't be at 0%, but may allow you to borrow more and over a longer period than you'd get on a credit card. Repayments will be structured for you to clear the debt at the end of the term, which is usually between one and five years.
  

  Using a loan to buy the car means you'll own it outright. See our Cheap loans guide for the best buys and full help, read our Car finance vs bank loan guide for a comparison with car finance, and check out our personal loan calculator. This will show how much you could borrow and how much interest you would pay.

• Hire Purchase (HP) – an option if you're struggling to get a cheaper loan, though the lender owns the car until you've made all the repayments
  

  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 security can mean an HP deal will be 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.
  

  Like with PCP above, the dealer will be making money from the finance deal, so it may offer larger discounts or contributions to the deposit on new cars. For used cars, this may mean you can haggle some money off. Always be careful to calculate the total cost you'll need to repay taking into account all interest. This will show the 'true' value of the discount. See our Cheap Hire Purchase guide for more.

• Car leasing/Personal Contract Hire (PCH) – 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 have any excess mileage or cause any damage). See our Cheap car leasing guide for full help.

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 PCP 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. 

• 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 to £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 PCP finance 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.

While specific requirements vary between lenders, some of the details and documents you will likely need to provide when applying for PCP finance include:

• Your personal information. This includes your full name, date of birth and contact details, such as your phone number and email address.

• Your employment and income details. For instance, your employer's name and contact information and recent payslips or proof of income (such as bank statements and tax returns if you're self-employed).

• Your address details. This typically includes information on the length of time at your current address and previous address details if you've moved recently.

• Some financial information. For example, details of existing financial commitments (such as credit cards and mortgage), bank statements showing your income and outgoings, and details of any other assets or liabilities. Most lenders will also ask you to undergo a credit check. Learn more about this and how to check your score for free by reading MSE's guide to checking your credit report.

• Your vehicle information. This includes the make, model and registration number of the car you are interested in, the purchase price (and any optional extras), and the details of any deposit you intend to make.

• Your ID documents. You'll need to show proof of identity (such as a passport) and a proof of address (such as bills or a council tax statement). 

• Your driving licence. A copy of your driving licence will be required. Check if yours is still valid using our Driving licence renewal guide.

• Your bank details. These are needed to set up the Direct Debit for your monthly repayments.

• Your insurance details. Some lenders may require proof of car insurance cover. Find out how to get cheap insurance by reading our full guide.

Always check with the specific finance provider for its exact requirements, as it may have additional criteria or ask for different documentation.

If you find yourself struggling with your PCP repayments, you have some options:

• Contact the lender early. Reach out to your finance provider as soon as you realise you might struggle making payments. The quicker you do so, the more options it'll have to help you and the sooner you can get back on track financially. Be upfront with your circumstances so the lender can understand your situation.

• Explore your options with your provider. Some lenders may be willing to restructure a PCP agreement, whether by extending the loan term, adjusting monthly repayments or deferring instalments for a short period – otherwise known as a payment holiday. Bear in mind that these options may increase the overall cost of your loan and affect your credit score. That said, these are still preferable to defaulting on your deal.

• Consider handing in your car. As touched upon earlier, you can hand the car back before the term is over. However, if you've paid less than 50% of the total cost of the car, it may be worth hanging on to it (if possible). This is because to terminate the deal you'd need to have paid at least half of the agreed instalments, so it would be possible to keep hold of the car until this time.

• Part exchange the vehicle. Alternatively, see if you can part exchange your car for a more affordable model to reduce your monthly repayments. Bear in mind that you'll have to pay an early settlement figure and possibly further costs to clear the borrowing, so factor these in. If your car is worth less than this total, it may not be worth the trade.

• Review your insurance cover. Check any insurance cover you have in place, especially if it includes payment protection or gap insurance, as these may help you in specific situations (such as if you write off a car). You can read more about gap insurance in our FAQ section.

• Get free debt help. If your financial difficulties extend beyond your PCP contract, seek further support. You could create a budget, claim any benefits you're entitled to, and cut the cost of your debt – see how to do this and more, plus accessing free support with your finances, in our full Debt help guide.

• Understand repossession procedures. A lender can only repossess your car without a court order if you've paid less than a third of the agreement. Still, it's a good idea to be aware of the terms and conditions outlined in your PCP agreement regarding repossession. Understanding the lender's policies can help you navigate the situation if it gets to this stage. 

Remember, communication is key. Keeping your lender informed and working together to find a solution is the best approach. Ignoring the issue can lead to more significant problems, so it's important to address financial challenges head-on.