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How does PCP work?

How does PCP work?
Source: Getty Images


Buying a new car can be a costly business. If you are after a new set of wheels but don’t have the cash to pay for them, then there are car finance options available. But how do you know which is the right one for you? In this article, we’ll take a close look at how PCP works. We’ll explore what it is, its pros and cons and what to do at the end of an agreement.

What is PCP and how does it work?

Personal Contract Purchase, or PCP, is essentially a type of car loan. It works like a long-term rental, typically over a term of three to five years.

Instead of taking a loan out for the full cost of the car, with a PCP you pay off the difference between the price of the car when you take the plan out and the predicted value of the car at the end of your agreement. The predicted value will be based on an agreed annual mileage. So you are basically just paying the devaluation cost of the car during your contract.

PCPs have three elements:

  1. A deposit, which is around 10% of the car’s value.
  2. The amount you borrow, so the difference in value over the contract period.
  3. The final balloon payment you need to make if you want to purchase the car at the end of your term.

For example, if the car you want is worth £25,000, you put down a deposit of £2,500. If the car’s predicted value for the end of your three-year agreement is £12,000, your loan amount would be £10,500 plus interest. At the end of the agreement, you either pay the final £12,000 to keep the car, or you hand the keys back.

What are the pros and cons?

Pros

  • PCP is a good car finance option if you want to change your car in a few years’ time.
  • The monthly repayments on a PCP are typically less than a hire purchase agreement or personal car loan, as you are not paying off the full balance of the car.
  • You don’t need to worry about the resale value of the car.
  • With some packages, dealers will include service and maintenance.

Cons

  • You don’t own the car during your contract period.
  • There are extra charges at the end if the car has sustained damage, or you have gone over the agreed mileage.
  • Interest rates tend to be higher on a PCP.
  • If you are unable to keep up with your monthly repayments during your PCP term, you will have to give the car back.

What happens at the end of my PCP agreement?

So, now we know how PCP works, what happens at the end? As we have already highlighted, taking out a PCP finance plan means that you do not own the car during your contract period. When you reach the end of your term, there are three options available:

1. Buy the car

If you want to buy the car, then you will need to make the final balloon payment. This will be the value of the car at the end of your payment term. Once you have made this payment, you will own the car outright.

2. Get a new car

A common option for drivers who use PCP is to get a new car on with a new PCP deal. Sometimes, you will have ‘equity’ left over from your previous agreement. So for example, the predicted value of the car was £12,000 when you took out your PCP, but by the end of the three years the car is valued at £13,000. You could then take the £1,000 difference and put that towards a deposit for a new PCP finance plan.

3. Give the car back

There is always the option to give the car back and walk away. This means that you are not tied to that dealer if you want to buy a new car. Just be aware that even though you are handing the car back, you may face charges if you have gone over the agreed mileage or if the car has sustained any damage.

What other car finance options are there?

PCP is just one option for car finance. For more information on other finance plans you could consider, check out our articles on what to know about car loans for new cars and making sense of car finance rates. Another useful resource to compare different car finance plans is the Money Advice Service

Of course, you don’t have to use a specific car finance product to buy a new car. Other options include a personal loan or a 0% purchases credit card to fund your new set of wheels.

What next?

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