PCP Car Finance Guide

Getting yourself a new car is a big deal whichever way you look at it. Not only are you investing in something to drive you wherever the road will take you, but you’re also finding the perfect look – after all, you’re going to be driving it for quite some time.

But aside from all of that, the biggest deal-maker or deal-breaker of all is the cost. Cars rarely come cheap and finding the money can sometimes be difficult. That’s why car finance is hugely popular, helping you spread the large cost over several months and years to ensure you can have that model you always wanted. But there are a number of different finance options available.

One of those is PCP finance, which is perfect for a variety of customers, including both business and private drivers. But what exactly is it? Let us break PCP finance down for you.
 

What is PCP Finance?

PCP stands for ‘Personal Contract Purchase’. Like most car finance options, PCP finance can be used on any number of cars, including new, nearly new and used cars that are up to three years old.

After you’ve selected the car you intend on buying, you and the dealership will agree to a contract length and a mileage allowance. Once this has been agreed, you’ll then put down your deposit.

Because of these agreed factors, an estimate will then be made on what the car’s value will be at the end of the contract. This is known as ‘projected value’.In terms of the cost, the ‘projected value’ is then offset, which will leave you with the remaining balance of the vehicle, plus a little interest. This will then be split into monthly payments across the duration of your contract. You’ll then be given the car, you’ll hop in and treat it like any car purchased on any other finance option.However, this is where one of the key differences comes in. When the contract ends you’ll have several options as to what to do next. You’ll be given the option to pay off the projected value of the car - allowing you to take full ownership of the vehicle. You could also use any equity the car still has to put as a deposit on your next car, or you could simply choose not to do any of these, hand the car back and leave it with the dealership where you found it. It’s worth noting that, if you choose to hand the car back and you’ve exceeded the mileage allowance you agreed at the start of the contract, you may incur charges. These are known as overmileage payments. These are added as, if the car’s got more miles on the clock than anticipated, that ‘projected value’ figure forecast at the start will now be inaccurate – the car will have depreciated more.
 

Who is PCP Finance best suited to?

With so many different car finance options available, not every option is going to be right for every person, which is true of PCP finance.

If you love to have flexibility, and most importantly options when it comes to your day-to-day life, then this is probably the car finance option for you.

Because you only technically have the car for the duration of your contract, this will give you the time to decide whether the car is right for you. It’ll also allow you to re-evaluate your financial situation further down the line before committing, as you’ll be able to figure out how much the car costs to run, and weigh that up against keeping it or opting for something different.

Cars operating on this finance model tend to have lower monthly repayments too, which is down to the payments covering the car’s depreciation and interest, rather than the total overall value plus interest.
 

What other finance options could I consider?

As mentioned, PCP finance is only one type of car finance option, and there are many others available out there if this isn’t right for you.

Options to consider are:

Hire Purchase (HP)

This is a traditional form of car financing available to private customers. This is often used on new cars and those under 10 years old. Just like with PCP Finance, you’ll place a deposit and pay monthly instalments for the car – but these payments cover the total value of the car and not merely it’s depreciation, over terms of one to five years, as agreed. That means monthly instalments tend to be much larger than they would be with PCP Finance, however by the end of the contract, you’ll have paid the full value of the vehicle. You won’t need to pay any balloon payment to make it yours and keep it. 

Balloon Hire Purchase

Available to both business and personal lease, this operates in a similar way to HP finance. However, there is a key difference in that there is a balloon payment at the end. This is a set amount agreed at the beginning of the contract that’ll be owed at the end, before you can take ownership. It’ll help reduce the price of monthly instalments. 

Business Contract Hire (BCH)

This is a simple form of finance, often given on new cars, that’s both straightforward and convenient for business drivers. It’s basically a form of car rental, where a monthly rate is paid for the hire of the vehicle over an agreed term. The lender remains the owner of the vehicle throughout, meaning the vehicle itself is kept off the company balance sheet and, for VAT registered companies, that 50% of the VAT on the supply of the vehicle can be claimed back. At the end of the term, the vehicle is handed back – leaving the lender to deal with depreciation and resale, and meaning the company isn’t left with an asset it no longer needs. Though it’s important to note that there’s no option to buy the vehicle and mileage limits will be included in the agreement.

Personal Contract Hire (PCH)

A great option for private drivers, this is similar to BCH, where you’ll agree a rental term, set a mileage allowance and finally pay a deposit. Over the course of the payments you essentially ‘rent’ the car, and then return it when the contract is up.

Advance Payment Plan (APP)

An option more suited to business customers looking for finance cars. This plan will offer flexibility when it comes to payment options.

With so many financing options available, you could have your dream car sooner than you realised, with a payment plan that suits you. For more information about car financing, read our dedicated guide.