Personal contract purchase (PCP) explained - Car Finance Guide

There are lots of different ways of buying a new or used car. Here, we look at the pros and cons of personal contract purchase (PCP) schemes...

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What is personal contract purchase?

Personal contract purchase (PCP) is the most popular way of buying a new car; more than 80% of them are purchased using this form of finance, and it’s becoming more popular with used car buyers too. 

A PCP is technically a form of hire purchase (HP), but a substantial portion of the amount borrowed is left at the end of the loan.

So whereas conventional HP divides the total amount borrowed into equal monthly payments, typically over three or four years, PCP involves a series of smaller monthly payments, with a larger payment at the end of the agreement if you want to own the car outright. This end payment is sometimes referred to as a balloon payment, or the minimum guaranteed future value (MGFV). PCP deals most commonly last for between two and four years. 

How does personal contract purchase work?

First, you need to decide how much you want to pay each month for the use of the car and how many miles you’ll be doing. Most deals will require you to put down a deposit (usually around 10%) and then pay a number of fixed monthly payments that are calculated to cover the cost of the car’s depreciation while you’re using it. 

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What happens at the end of a personal contract purchase deal?

At the end of the deal, you have three options: you can simply hand the car back and walk away, or, if the car is worth more than the MGFV (which is usually the case), you can use the difference between the final payment and its true market value as a deposit for another new car. 

The third option is to pay the MGFV and buy the car outright. This last choice might sound daft, but car makers are so keen to get consumers to take out PCP deals that they often offer ‘deposit contributions’ of around £1500 and lower interest rates than you’d get with other forms of finance. In fact, at the time of writing, some car makers were offering PCP deals with such low interest rates that they are by far the cheapest way of buying the car outright.  

Personal contract purchase advantages

1. The monthly payments are lower than HP, so you can afford to buy a more expensive car. 

2. You don’t have to worry about the value of the car when it’s time to sell it on, because the MGFV guarantees how much it will be worth if you look after it carefully and don’t exceed the annual mileage limit. 

3. You have the option to buy the car at the end of the deal; you don’t have this if you take out a leasing deal.  

4. Manufacturer incentives can make a PCP the cheapest way of buying a car outright, so it’s worth comparing the costs of this and HP before you sign up for finance. 

5. It’s possible – and sometimes encouraged by dealerships – for you to terminate a three-year PCP deal after two years and take out a new agreement on a new car. If you enjoy getting a new car frequently, a PCP is a good way of doing so and keeping costs down, although the monthly payments will be higher than those on a leasing deal. 

6. Dealers will often throw in servicing and maintenance packages so you’ll only have one monthly payment to cover most of your costs. 

Personal contract purchase disadvantages

1. You don’t own the car, so don’t have a legal right to sell it unless you decide to pay the MGFV. That said, a dealer might take a car back early and settle the finance if you’re taking out a new deal on another car. 

2. You’ll be charged (around 5p to 15p per mile) for every mile you do above the agreed annual maximum, so it’s important not to underestimate your mileage when signing up for a deal. 

3. Ensure your car is serviced on time and kept in good condition, because you'll be charged for any repairs that need to be done if you’re handing it back at the end of the deal. 

4. If you do substantially exceed the mileage, the MGFV might decrease, leaving you without any money for a deposit on a new car. 

5. If you’re one of the 80% of PCP customers who decides not to buy the car at the end of the deal, you’ll have paid more per month than if you’d taken out a personal lease instead. 

Where can I get the best personal contract purchase deal?

The most common way of taking out PCP finance for new or used cars is usually from a finance company that either works for or is owned by a specific car maker. However, there are also many other companies offering this form of finance, and we have our own new car buying service, where What Car? approved dealers will provide you with a personalised finance offer.

What’s the difference between personal contract purchase and leasing?

The main difference between these two forms of finance is that you have the option to buy the car at the end of a PCP agreement, but there’s no option to buy on a leasing deal. 

Personal contract purchase FAQs

Can you buy a used car on personal contract purchase?

Yes, a growing number of car makers are also offering PCP deals on used models and online brokers offer PCP deals with competitive rates too.  

How do I calculate the total cost of a personal contract purchase deal?

You simply need to add up the deposit, monthly payments and MGFV. Most car company websites have finance calculators that will show you all of these figures for each model and trim level and let you alter the deposit and term of the deal and see how it affects the monthly payments and overall cost. 

Can I part-exchange a car I have on a personal contract purchase deal?

Some finance companies make this easy and relatively inexpensive to do, and others stipulate that you can’t end the deal early, so read the terms and conditions carefully before taking out a deal. 

Ending a PCP deal early will usually involve paying a settlement fee, which will include the cost of the car that hasn’t been paid off, plus the MFGV and some interest, although less than would be payable if you completed the original payment term.  Provided the value of the car is greater than this total, your finance will be settled and any surplus put towards a deposit on a new car. If its value is less than the settlement fee, you’ll need to make up the difference.  

Is the use of a car on a personal contract purchase tax deductible?

Yes. Provided you’re self-employed with an annual turnover below the VAT threshold, you can claim a certain proportion of the monthly payments as business expenses. There are bigger concessions for electric cars, and the precise rules on tax can be complicated, so it’s worth speaking to an accountant to ensure you’re getting the best deductions.

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