What is PCP? Personal Contract Purchase Explained

What is PCP?

PCP stands for Personal Contract Purchase. It is a type of car finance that allows you to drive a newer car while keeping your monthly payments lower than a typical Hire Purchase agreement.

The key difference is that you don't normally pay off the entire value of the car during the monthly finance term. Instead, part of the car's expected value is deferred until the end of the agreement.

At the end of the PCP agreement, you usually have three choices:

• Return the car and walk away, subject to mileage and condition requirements.
• Pay the optional final payment and keep the car.
• Part-exchange the car and potentially use any equity towards another vehicle.

Think of PCP as a finance agreement where you pay for the car's expected depreciation during the agreement, plus interest and applicable charges, while leaving an agreed future value until the end.

How PCP Actually Works

PCP can look complicated when you first see the figures, but the basic idea is straightforward. Here's how a typical agreement works.

1. You choose your car and agree on a price

You choose the vehicle you want and agree the cash price with the dealer or finance company.

The finance provider then estimates what the car should be worth at the end of the agreement. This future value is often called the Guaranteed Future Value (GFV) or Optional Final Payment, depending on the finance provider and agreement.

The £8,000 isn't simply removed from the finance agreement. It is generally left as the optional final payment due if you want to own the vehicle at the end.

2. You pay a deposit

Many PCP agreements allow you to make an upfront deposit. This could be a manufacturer contribution, your own cash contribution, or a combination of both.

A larger deposit generally reduces the amount you need to finance and can reduce your monthly payments. However, putting down a large deposit doesn't automatically make the deal cheaper overall.

3. You make monthly payments

Your monthly payment is based on several factors, including:

• The price of the car
• Your deposit or initial payment
• The amount financed
• The agreement term
• The expected future value of the car
• The interest rate
• Any applicable fees or charges

Because the final payment is deferred, your monthly payments can be lower than they would be if you were financing the entire vehicle through Hire Purchase over the same term.

4. You agree to a mileage allowance

PCP agreements normally include an agreed annual mileage allowance. Common allowances can be around 8,000 to 12,000 miles per year, although higher or lower limits are available depending on the finance provider and vehicle.

Your mileage allowance matters because the car's expected future value depends partly on how much you drive it.

If you exceed the agreed mileage and return the vehicle, you may have to pay an excess mileage charge.

The actual excess mileage rate varies by agreement, so always check your finance contract before signing.

5. You return the car at the end

If you don't want to buy the car, you can normally return it at the end of the agreement.

The finance company will assess the vehicle's condition and mileage against the terms of your agreement. You may be charged for excess mileage or damage that falls outside the accepted standards for normal wear and tear.

If the car is within the agreed mileage and is in acceptable condition, you can normally hand it back without paying the optional final payment.

6. Or you can buy the car

If you decide you want to keep the vehicle, you can normally choose to pay the optional final payment specified in your finance agreement, subject to the contract terms.

Using our example, that might be £8,000.

This amount was agreed at the beginning of the agreement. The actual market value of the car at the end may be higher or lower.

Why People Choose PCP

You can change cars every few years

One of the biggest attractions of PCP is the ability to drive a relatively new car and change it again after the finance term.

For someone who likes having a newer vehicle, PCP can make that process relatively straightforward.

Monthly payments can be lower

Because part of the vehicle's value is deferred to the optional final payment, PCP monthly payments can be lower than financing the entire purchase price over the same term with Hire Purchase.

However, a lower monthly payment does not necessarily mean a lower total cost.

You don't have to sell the car yourself

If you decide to return the car at the end of the agreement, you don't normally have to find a private buyer or negotiate a sale yourself.

You simply follow the return process set out by your finance provider, provided you meet the agreement's mileage and condition requirements.

You may have warranty peace of mind

Many people use PCP to finance newer vehicles that remain within their manufacturer's warranty period for at least part or all of the agreement.

This can reduce the risk of unexpected major repair bills, although a warranty doesn't cover every possible repair or maintenance item.

The Downsides of PCP

You don't automatically own the car

This is probably the most important thing to understand about PCP.

Your monthly payments don't mean you've paid off the entire vehicle. At the end of the agreement, you normally need to either return the car or pay the optional final payment if you want to own it.

Mileage limits can be restrictive

If you drive a lot, PCP may become less attractive because exceeding your agreed mileage can result in additional charges when the vehicle is returned.

A driver covering 20,000 miles a year could potentially face a significant excess mileage bill on a PCP agreement designed for 10,000 or 12,000 miles a year.

If you regularly drive high mileages, our PCP vs Hire Purchase cost comparison shows why the difference can become substantial.

Wear and tear can result in charges

When you return the vehicle, it is expected to have normal wear and tear. Damage that goes beyond what the finance company considers acceptable may result in a charge.

Things such as significant scratches, dents, damaged alloy wheels or damaged interior trim can potentially create additional costs.

Learn more about PCP wear and tear charges.

Ending the agreement early can be complicated

Life doesn't always go according to plan. You might lose your job, change your circumstances, need a larger vehicle or simply decide that you no longer want the car.

You should not assume that you can simply hand the car back whenever you want without further financial consequences.

Your options depend on your specific finance agreement and your circumstances.

See your early exit options.

You can still pay for depreciation even if you drive less

Your mileage allowance doesn't work like a pay-as-you-go rental charge.

If your PCP agreement is based on 12,000 miles a year and you only drive 5,000 miles, you generally don't receive a refund simply because you've driven fewer miles. The agreed finance payment remains the same.

Who Does PCP Suit?

PCP can be a good fit if your priorities are predictable payments, a newer vehicle and flexibility at the end of the agreement.

• You like driving a new or relatively new car every few years.
• You have a predictable commute and can estimate your annual mileage accurately.
• You want minimal hassle at the end of the agreement.
• You don't particularly care about owning the vehicle.
• You value the peace of mind of a newer car and manufacturer warranty.
• You want the option to buy the car later without committing to that decision today.

Who Doesn't PCP Suit?

PCP isn't automatically the best option for everyone. Another form of finance—or buying a car outright—may make more sense depending on how you use your vehicle.

• You drive more than 12,000–15,000 miles a year and cannot secure a suitable mileage allowance.
• You want to own the car at the end without making a large final payment.
• You want to modify the car extensively.
• You cannot accurately predict your annual mileage.
• You want to keep your car for five years or more.
• You want to minimise the number of finance agreements you take out over your lifetime.

For long-term ownership, Hire Purchase can sometimes make more sense because once the agreement is paid off, there are no further finance payments and you own the vehicle.

Comparing PCP to Hire Purchase

The biggest difference between PCP and Hire Purchase is what happens to the balance at the end of the agreement.

Want to understand Hire Purchase in more detail? Read: What is Hire Purchase?

Want to see which option can cost less? Read: Which is Cheaper — PCP or Hire Purchase?

What About Wear and Tear Charges?

When you return a PCP vehicle, it doesn't have to look brand new. Cars naturally pick up some signs of use over time.

Finance companies generally distinguish between fair wear and tear and damage that goes beyond what would reasonably be expected for the vehicle's age and mileage.

Potential problems can include:

• Deep scratches or dents
• Significant alloy wheel damage
• Torn or badly damaged interior materials
• Large chips or damage to bodywork
• Damage caused by misuse

How Do PCP Mileage Limits Really Work?

When you take out PCP, you normally agree to an annual mileage figure. This is used by the finance provider when estimating the car's future value.

For example, you might agree to:

• 10,000 miles per year
• 3-year agreement
• Total agreed mileage: 30,000 miles

If you return the car with significantly more than the agreed mileage, an excess mileage charge may apply.

What if your mileage changes?

If your circumstances change during the agreement, contact your finance provider rather than simply ignoring the issue.

For example, if you suddenly get a new job that adds 10,000 miles to your annual commute, the original mileage estimate may no longer be realistic.

Changing the mileage allowance can affect your monthly payments and should be discussed with the finance provider as early as possible.

What Does PCP's Warranty Actually Cover?

PCP itself doesn't automatically mean that every repair and maintenance cost is included.

What is covered depends on the vehicle's manufacturer warranty, any servicing package included with the deal, and any additional products you purchase.

You may still be responsible for routine costs such as:

• Fuel
• Insurance
• Tyres
• Routine maintenance not included in a service package
• Damage caused by misuse
• Items excluded from the manufacturer's warranty

Can You Change Your Mind and End PCP Early?

You may have options for ending a PCP agreement early, but you should not assume that returning the vehicle early automatically clears everything you owe.

The exact options depend on your finance agreement and circumstances. Depending on the situation, possibilities can include settling the finance, voluntary termination where the legal requirements are met, or other arrangements with the finance provider.

What Hidden Costs Are There in PCP?

PCP can be straightforward when you understand the agreement, but there are several costs that drivers sometimes overlook.

This is why comparing PCP deals based solely on the monthly payment can be misleading.

A better comparison looks at the total amount payable, the deposit, mileage allowance, optional final payment, interest, included extras and your likely end-of-agreement choice.

So, Is PCP Worth It?

PCP can be an excellent option for the right driver, particularly if you want a newer car, predictable finance payments and the flexibility to return, replace or purchase the vehicle at the end.

But PCP isn't automatically cheaper than other forms of finance.

The biggest questions to ask yourself are:

• How many miles will I realistically drive each year?
• Do I want to own the car at the end?
• Can I afford the optional final payment if I decide to keep it?
• How long do I normally keep my cars?
• Am I comfortable with mileage and condition requirements?
• What is the total amount I will pay under the agreement?