What is PCP Car Finance?
Understanding Personal Contract Purchase finance and how it works
Personal Contract Purchase (PCP) is one of the most popular ways to finance a car in the UK. It allows you to drive a new or nearly-new vehicle with relatively low monthly payments, with options at the end of the agreement to either return the car, purchase it outright, or use any equity towards a new vehicle.
How Does PCP Work?
A PCP agreement typically works in three stages:
Deposit
You pay an initial deposit, which is usually around 10% of the vehicle's value, though this can vary.
Monthly Payments
You make fixed monthly payments over an agreed term, typically 24 to 48 months.
Balloon Payment
At the end of the agreement, there is a large final payment (often called the "balloon" or "optional final payment") representing the vehicle's predicted future value.
Your Options at the End of PCP
At the end of a PCP agreement, you typically have three choices:
Return the Car
Hand the vehicle back to the finance company and walk away with nothing further to pay (assuming you have stayed within mileage limits and the car is in good condition).
Pay the Balloon
Make the final balloon payment and become the outright owner of the vehicle.
Part-Exchange
If the car is worth more than the balloon payment (you have "equity"), you can use this towards the deposit on a new PCP agreement.
Key Features of PCP
Guaranteed Minimum Future Value (GMFV)
The balloon payment is based on the Guaranteed Minimum Future Value – the finance company's prediction of what the car will be worth at the end of the agreement. This protects you if the car's actual value falls below this amount.
Mileage Restrictions
PCP agreements include an annual mileage limit, typically between 8,000 and 15,000 miles per year. If you exceed this limit, you will be charged for each additional mile when you return the vehicle.
Condition Requirements
The vehicle must be returned in good condition, within the fair wear and tear guidelines. Excessive damage may result in additional charges.
PCP vs HP (Hire Purchase)
While PCP and HP are both forms of car finance, they work differently:
HP (Hire Purchase)
- Pay off the full value of the car
- Higher monthly payments than PCP
- Own the car outright at the end
PCP (Personal Contract Purchase)
- Only pay off the depreciation
- Lower monthly payments
- Don't own unless you pay balloon
The Commission Problem
When you take out PCP finance through a car dealer, the dealer typically receives commission from the lender. Before January 2021, some arrangements allowed dealers to increase the interest rate you paid in order to earn more commission – without telling you.
The FCA banned these Discretionary Commission Arrangements (DCAs) in 2021 and is now investigating how consumers may have been affected. If you took out PCP finance before this ban and were not told about commission, you may be entitled to compensation.
Estimated average compensation per affected agreement
Potential total redress to lenders according to FCA estimates
Is PCP Right for You?
PCP can be a suitable option if:
You want lower monthly payments than HP
You like changing your car every few years
You don't drive excessive miles
You take good care of your vehicles
However, it's important to understand the terms of your agreement and ensure you are getting a fair deal on the interest rate. If you weren't told about commission, you may not have received the best rate available to you.
Think Your PCP Finance Was Mis-Sold?
Blue Lion Law can assess your individual circumstances and advise whether you may be entitled to compensation.