Buying a car through Personal Contract Purchase (PCP)?

What is a Personal Contract Purchase (PCP)?

A Personal Contract Purchase (PCP) is a complicated way to pay for a car. It’s like long-term rental, allowing you to use the car until the contract ends. At the end of the contract, you can:

• return the car
• pay the resale value and keep it, or
• use the resale value towards buying a new car.

Here’s what you need to know about how a PCP works:

• the agreement lasts three to five years
• you’ll need to pass a credit check
• >you must pay a deposit upfront
• the total amount you will pay over the entire length of the contract is often higher than Personal Contract Hire (PCH)
• you won’t own the vehicle at the end of the agreement; you can buy it by paying a final payment or ‘balloon payment’, which is normally a few thousand pounds
• you can also end the deal without buying the car outright
• there are strict terms in the agreement, like limits to the miles you can do
• you’ll often need to stay with the same dealer to be able to use any remaining equity in your car as a deposit for a new car through PCP.
• The interest you’re charged on your PCP arrangement will depend on your credit rating. See our guide How to improve your credit score for more information and how to check your reports for free.

How does a Personal Contract Purchase (PCP) work?

Here’s what will happen when you finance a car through a PCP:

1. First you’ll need to pass a creditworthiness assessment.

Before you sign up for a PCP deal, you’ll need to go through a creditworthiness assessment which is made up of two factors. First is the affordability of the PCP payments across the whole term of the contract based on your finances – think of it as finding out how difficult it is for you to keep up your repayments. The second is credit risk, which is the chances of you not paying your PCP loan back to the loan company.

You can get an idea of your affordability by looking at whether there are future costs that might affect your ability to keep up your repayments in four years’ time.

Budget planner To help you manage your money, try our free and easy-to-use Budget planner.

2. Then you’ll need to pay a deposit, usually 10% of the value of the vehicle.

3. You’ll then be able to use the car, but remember you don’t own it yet. You’ll also need to make your payments for the duration of the contract.

Make sure you stay within your mileage restriction. There will be charges if you go over your limit. Be extra careful not to damage it too as you may be charged at the end of the contract. If you think you may go over the allowed mileage it may be worth considering getting a deal with more mileage.

Top tip If you’ve taken out a PCP plan and intend to buy the car at the end of it, start saving up the balloon payment now.

People save money faster if they have a definite savings target, so find out how to set a savings goal

4. When the contract is up, you’ll need to decide if you want to keep the car, return it, or use its value to act as a deposit on a new PCP.

If you want to keep the car, you’ll need to make a final payment, often called a balloon payment. This is based on what the dealer thinks the car is worth now - its Guaranteed Minimum Future Value (GMFV). This can range from a few hundred to a few thousand pounds, but will be much more than the normal monthly payments.

If you haven’t got this money saved, you may have to take out another loan to pay it off.

5. If you’re not going to keep the car, you can hand it back without any further payments.

6. Alternatively, you can use the car’s value after paying off the GMVF as a deposit on a new PCP.

You may need to stick with the same dealer if you want to do this.

Important points to be aware of when getting a Personal Contract Purchase (PCP)

Be aware
Don’t be fooled by low monthly payments on PCP deals. The final ‘balloon’ payment can be significant. To avoid getting stuck, ask exactly how much you might owe at the end of the contract.

Because PCPs are complex and often poorly explained when you’re buying cars, there are some things you need to know that might not be clear.

• Always check your contract and the terms and conditions. There’ll be fees you’ll need to be aware of, and you’ll need to know what happens if you need to change the agreement later.
• Check how much you’re paying back, both monthly and in total – often you’ll pay more with a PCP than with other types of car finance.
• Check how far your agreed mileage is, and what the fees are for exceeding it.
• Excessive wear and tear and damage, such as scratches, can mean you’ll receive additional charges. Ask for written examples on how they judge what counts as excessive wear and tear and damage.
• To end the deal early or cancel it, you must have paid half the value of the vehicle. If you haven’t, you’ll need to pay the difference before you can get out of the contract. The car will need to be in good condition too, or you might be charged for repair costs.

Alternatives to Personal Contract Purchase (PCP) Top tip Most people with PCP plans don’t opt to buy the car at the end of their contract. (Source: the Finance and Leasing Association.)

The most important thing to decide, before you take out a PCP, is whether you’re likely to keep the car at the end of the PCP or not. If you’re not, leasing a car through personal contract hire (PCH) might work out cheaper for you.

Non-fuel running costs as part of a maintenance package are often included with a PCH, giving you things like annual car tax (commonly known as road tax) and routine servicing.

If you are planning to buy the vehicle outright so you own it, there are also cheaper options.

Your rights if you want to cancel a Personal Contract Plan (PCP) plan

Choosing the right PCP term is important. Go for a long period and you’ll end up paying more for the car. But if it’s too short, you’ll have higher monthly payments and could risk not being able to meet them.

If you can’t keep up your payments or simply want to cut costs, you have the right under the Consumer Credit Act to return the car as long as you’ve already made half your payments. This is called ‘voluntary termination’.

Find out more in our guide Ending a car finance deal early

What to do if you’re getting behind on car finance payments

If you’re struggling to meet household bills as well as your car payments, you can get free, confidential advice from a debt advice organisation or charity.

Find out where you can get free debt advice

Here are some other options for when you can’t keep up with payments.

Returning the car

If you’ve paid half the value of the vehicle, you can cancel or end the PCP early. If you haven’t, you’ll need to pay the difference before you can get out of the contract. The car will need to be in good condition too, or you might be charged for repair costs.

Talk to the finance company

They might offer to extend the length of the lease, which would lower your monthly payments, or come to some other arrangement to help you out.

Early repayment

You might be better off paying a settlement figure to the finance company, which would be one final larger payment to end the agreement. You can then keep the car or sell it.

Before it was banned in January 2021, some car dealers and credit brokers were allowed to decide the interest rate you’ll pay. If you took out car finance before then, you might have been overcharged. Find out how to complain and apply for compensation in our blog How to complain about mis-sold car finance.

Making a complaint

If a car you buy turns out to be faulty, your rights and options largely depend on who you bought it from and how they described the car. You have less legal protection when buying from a private seller or from a car auction than when buying from a dealer.

Find out more about Your rights if something is wrong with your car.