PCP Finance: The Unexplained Best Seller

With 91% of new cars bought on finance, it’s a tragedy to hear that some people still don’t understand car finance and car leasing products like Personal Contract Purchase. PCP deals aren’t for everyone so I’m here to try and clear it up for you, to ensure you don’t get fooled into an agreement that leaves you drowning in debt. There are other ways to finance a car but I will explain the most alluring method, which is PCP finance. Together we will be uncovering some car finance secrets to make you a car buying boss.


Please understand that all opinions in this article are my own. If you want to further understand if car leasing or financing is suitable for you, seek an expert opinion. Most major dealers are required to pass FCA exams before they can legally sell financial products, so they should know what they’re on about. However, here are the basics in plain English, before you visit the showrooms.

What Is PCP Finance? (Personal Contract Purchase)

PCP or Personal Contract Purchase is probably the favourite way to finance your next car. Why? Well, it’s the most flexible and usually the cheapest option to drive an otherwise unaffordable car. You will normally find that most dealerships offer exclusive rates on PCP deals, particularly brand new ones. Ironically, it’s also the most complex. You will not own the car unless you pay the balance at the end of your agreement.

How Does PCP work?

The general structure of a PCP deal is:

  • Initial deposit
  • Monthly payments over a set term
  • Exchange, Return or Pay optional final payment (sometimes referred to as a balloon payment).
  • You will not own the car at the end of your term unless you pay the optional final payment to buy it outright.
diagram for PCP car finance advice
Image courtesy of Confused.com

The deposit is rather flexible. Unlike other types of finance, there isn’t a ludicrous amount to pay upfront like 6x your monthly payments. Instead, you can put in what you’re comfortable with (typically a modest 20% of the car value) to arrive at the monthly payment you want in combination with the term and mileage – the more you pay upfront, the less you need to borrow.

The term is also flexible, usually up to 48 months (4 years) on a typical PCP deal. Essentially, this is how long you intend to keep your car but it’s not set in stone. As PCP grows more popular, manufacturers now offer whopping deals like 0% APR car finance deals over shorter terms such as 36 months.

The mileage is the biggest concern for most people contemplating PCP. You can set your annual mileage, say 9000 miles a year, for example. This does have a small impact on your monthly payment but the fear is going above your mileage. Your contract will state charges in pence per mile if you go above, however, this will only apply if you return the car to the finance company.

Is it better to get a car through finance?

A majority of people in the U.K. purchase cars on finance, whether that’s PCP, PCH, HP, Leasing or Personal Loan. The main reason is affordability. Could you walk into your local Audi dealership right now and pay cash for the new striking Audi S3? If you answered yes then please share your money-saving tips with us in the comments!

 Even if you could, should you? I don’t mean to scare you but imagine your house roof collapses. Devastating, right? I would much rather have that cash saved for emergencies that might be harder to find funding for. But whatever you do, make sure you decide a budget and stick to it. Do not sign up to a monthly payment that takes away from your savings.

budgeting for a car

What happens at the end of my PCP finance agreement?

When you come to the end of your term, you have 3 options:

Keep – If you love your car and don’t want to say goodbye, you can speak to your finance company about paying the optional final payment to own your car. Other fees may apply.

Return – You can return your car to the finance company. This is when the car will be thoroughly examined, including condition and mileage. Additional charges may apply at this point. This is NOT selling the car to them as they own it. You will not gain anything in return.

Exchange – The most common practice is to ‘trade-in’ your car. The dealership will value your car and use any equity to pay off your finance. If you have a surplus, this can be a deposit towards your next deal. Generally, you won’t get physical cashback in your pocket.
If your car is worth less than your finance settlement, you can decide to settle the difference or you can go back to point 2, where you return it to the finance company and let them take the blow.

Can I settle my PCP early?

Yes, you can settle PCP early. If you wish to own your car, simply call your finance company for a settlement quote and it in full. It is also possible to exchange before the end of your term depending on your cars value and your finance settlement figure at the time.

Before I share some benefits and disadvantages of PCP as a method of car finance, let’s reveal PCP deal secrets to make you a car buying guru! 

Over Mileage Charges – This only applies if you hand your car back to the finance company. If you want to trade your car in for a new one, you are not charged for the mileage but be conscious that a higher mileage can reduce the value of a car.

Exchange – Most people presume you’re required to go back to the same place you got the car. You don’t! If you have a ford now and fancy a Volkswagen next, just go to your local VW dealer who will be delighted to guide you through this stage.

ModificationsI probably shouldn’t be telling you this but even on PCP, you can do SOME mods. Anything cosmetic that can be easily removed, returning the car to its original condition, can be done. It’s not advisable to do any tuning modifications as this is more difficult to remove and dealerships and finance companies are less likely to accept your car.

Benefits

  • New car for lower monthly payments than Hire Purchase or Personal loan
  • Flexible – you have several options upon setting up and at the end
  • Can get a car you might otherwise be unable to afford
  • Services, warranties and/or other products may be included

Disadvantages

  • You won’t own the car unless you pay the final payment at the end
  • Car value might be less than settlement meaning you need to find cash somewhere
  • Extra charges may apply for mileage (if you hand the car back to the finance company)

Explore new cars that you could get on a PCP deal today – Click here to read my car reviews.

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