PCP (Personal Contract Purchase) car deals explained

PCP deals are a popular option for buying a car because they can be very flexible. Here’s how they work…

PCP (Personal Contract Purchase) car deals explained
  • Pros: low monthly payments, flexible options, guaranteed future value
  • Cons: expensive to buy a car outright, penalties for damage and excess mileage if car is returned, limited mileage

As the most popular option, used by 78 per cent of finance buyers, a personal contract plan (PCP) deal offers flexibility and low monthly instalments – although these don’t cover the full cost of the car.

PCP deals can be broken into three chunks:

  • An initial deposit. A dealer or manufacturer may make a contribution towards this; higher deposits lead to lower monthly payments
  • Monthly payments. These, together with the deposit, pay off the car’s predicted depreciation over the term of the contract
  • Final payment. At the end you can return the car, or make the final ‘balloon’ payment and own the car outright

The balloon payment is set by the finance company estimating the car’s value at the end of the agreement. This is known as the Guaranteed Minimum Future Value (GMFV).

While the positives of flexible terms, low monthly payments and a usually low rate of interest are very tempting for buyers, the negatives can have an impact if you're not careful. That's because the small print of the contract can include financial penalties for minor damage to the car while it's in your custody, and if you exceed the pre-agreed mileage limit, there will be a penalty to pay there, too.

You need to be fully armed with the facts when taking out a PCP finance deal, because sometimes it might be cheaper to take out a hire purchase agreement instead.

Still, PCP deals are proving popular with UK motorists, and in recent years have fuelled the boom in UK consumer credit. That's because big manufacturers such as Ford, Nissan, BMW and VW have the financial clout behind them to make PCPs affordable and available to more buyers looking to change their car for a new one.

With so many dealers offering PCPs, there will certainly be one to suit your next new car purchase, whether you're buying a supermini, crossover, hot hatch, estate or SUV. You can even get PCP deals on used cars, which will make your money go even further. As with all forms of credit it pays to be aware of the advantages and disadvantages of taking out a PCP. The flexibility and guarantee of a future value of the car when you come to the end of the plan are appealing, but dealers love PCPs too because the way they are structured means that buyers will come back to the same brand every three years or so and trade into another car.

A PCP finance deal will see buyers paying instalments that cover part of the cost of a new car – usually around a third of the list price – which means that these monthly outgoings will be lower than if you take out a loan to buy a car outright.

If you'd like to own the car at the end of the PCP, then you’ll need to stump up a substantial final payment – the GMFV payment – to take the keys. However, if you're looking to buy a car that you will want to keep, then a PCP probably isn't the right kind of finance for you.

However, if you must have the latest car to keep up with the neighbours, then a PCP can make a lot of sense. You'll have a brand-new car on your driveway every three years or so, and because you're not buying outright, you can get a bit more car for your money than you'd be able to get by taking out a conventional loan. A canny PCP provider will do everything they can to ensure that your car’s value at the end of the PCP term will be a little higher than the GMFV payment required to buy it outright.

This difference between the balloon payment and the car's value can then be used to help reduce the deposit you will pay on the next car the dealer will line up for you when the current PCP runs out.

This is ideal if you want to drive away in a car from the same manufacturer, although isn't great if you've had a bad experience with the manufacturer and want to walk away. You can't take this cash away and spend it elsewhere - it's just there to sweeten any future PCP you may want to sign up to.

If you do walk away, that's it - no car, no cash back, but at least you don't have to cover the final balloon payment. Once the monthly payments stop, that's it, you're back to square one. The only outstanding payments there may be at this stage will be if you've exceeded the mileage allowance for the term of the PCP, or if there is damage to the car that will need repairing.

A PCP can be a good way of owning a car for a short term, then if your circumstances change, you don't have to worry about the financial burden any more once you've handed the car back. But then you won't have the car as an extra bargaining chip when it comes to arranging a deposit on your next car.

Guaranteed Minimum Future Value (GMFV)

When you set up a PCP deal, the dealer will give you a 'Guaranteed Minimum Future Value' for the car. The GMFV is the minimum amount the car will be worth at the end of the agreement. So if the car unexpectedly drops in value, you'll be protected. And if the car happens to be worth more than the GMFV at the end of the PCP, you can use the equity as a deposit in your next deal.

Lenders are traditionally conservative when estimating the GMFV, so the car is often worth more than predicted – although this trend is less common than it once was. If the car is worth more than the GMFV, you can put any excess payments you have made towards its deprecation into a new vehicle. If the car is worth less, it’s the lender’s problem – you can simply hand it back.

Manufacturers push PCP, so interest rates are often low, but they also set mileage limits with an excess mileage charge applied if you exceed them, usually at a pence-per-mile rate. What's more, you'll need to maintain the car in accordance with the manufacturer’s service schedule. While that's good practice anyway, if the car is damaged and you return it at the end of the PCP deal, the dealer can mark down its value.

If you want to take ownership of the car at the end of the term, PCP will often prove more expensive than hire purchase finance deals, but if you want to hand the car back or trade in for an all new model, as most PCP customers do, it's a good option.

PCP agreements start at less than £60 a month for some used city cars, depending on your credit history. A two-year-old family crossover such as the Nissan Qashqai can be yours for just over £150 a month on PCP, while monthly payments on a brand-new Qashqai typically cost around £260.