Advantages and disadvantages of PCP car finance

Date Posted 8th August 2022
Read Time 8 min read

When looking to finance a new car, the most popular option remains a Personal Contract Purchase (PCP) agreement: this allows you to drive the latest cars at a fixed monthly rate, and offers the flexibility to change your vehicle more frequently. 

However, as with all vehicle finance options, PCP has possible downsides too. 

We break down what sometimes feels like information overload, into a simple and informative way for you to better understand whether PCP is the right option for you. 

Here are the advantages and disadvantages of leasing a vehicle through PCP to help you make an informed decision:

what is pcp and is it for you?

What is Personal Contract Purchase and how does it work?

Personal Contract Purchase is a type of car finance that is determined by the potential depreciation of the car you choose. Monthly costs will be based on the annual mileage limit and the agreement term over which you decide to keep the car. The more miles you drive each year, the higher your monthly payments will be because more miles on the clock means the car will be worth less at the end of the agreement.   

Traditionally, at the beginning of a PCP agreement, you will have the option to put down a deposit. The higher your deposit, the lower your monthly payments will be. One unique offering from Hippo Leasing is we have great zero deposit options available for all circumstances.

Choosing a longer term will mean that your monthly repayments are lower, however, as the finance is spread out for longer, you’ll be paying a higher amount of interest overall.

At the end of your PCP agreement, you will have three options to choose from: make the final balloon payment if you want to keep the car, part-exchange the vehicle for another based on its value, or hand the car back to the finance company. Until then, the vehicle belongs to the finance company and you are essentially renting the car until the end of your term.

Is PCP the right finance for you?

Personal Contract Purchase: advantages and disadvantages

Cars and vans are a costly investment. You will want to choose a vehicle that matches your criteria, and offers the best in reliability and value for money. PCP is a popular type of finance for drivers looking to get their chosen new or approved used vehicle. If you’re on a budget, or you want the latest car model from your favourite manufacturer, PCP is a great way to get the car of your choice without worrying about buying it outright. 

Before you can be fully confident in your decision to opt for a PCP deal, here’s a quick rundown of the advantages and disadvantages of this type of finance.

Advantages of PCP

Lower monthly payments to suit your budget

Though PCP is essentially a loan, you won’t be paying off the full value of the vehicle. You will only pay the cost of depreciation of the vehicle plus interest. Therefore, your monthly payments are likely to be lower than most other finance alternatives, giving you a more affordable option to drive a new car.

Additionally, you won’t need a lump sum of funds for a PCP deal to go through. You can choose a zero-deposit deal, or one with a manufacturer contribution, and a flexible repayment term – usually 24 to 48 months, which will help to reduce your fixed monthly payments. 

The interest rate is fixed from the time you start the contract. With all of this in place, you’ll pay the same amount every month to suit your monthly budget.

Change your car regularly

Flexibility is at the heart of PCP. When your agreement is over, you can either part-exchange the vehicle for a new one, or give it back to the finance company. This way, you can choose to change the vehicle you drive every few years. 

Drive a newer, high-spec car 

PCP gives you the choice of driving away in the latest cars and vans, which would otherwise be very expensive to buy outright. You can choose a higher-spec car, at a more affordable monthly payment that may previously have been out of your budget. 

Potential positive equity 

If at the end of the term, your car is worth more than its predicted guaranteed minimum future value (GMFV), you’ll have some positive equity to contribute towards your next car.

Don’t worry about selling the car on

At the end of a PCP deal you won’t necessarily own the car. Although you have the option to purchase it via the final balloon payment (more below), you won’t have to worry about the hassle of selling the car before being able to get a new one. 

Zero deposit options

When purchasing a car outright, you will need to put up the funds upfront, however, PCP allows you to get behind the wheel of a car without worrying about a large deposit. Of course, the more deposit you can afford to put down, the lower your monthly payments will be. For anyone who doesn’t have savings for a deposit – you can still be considered for PCP through Hippo Leasing’s brilliant zero deposit deals.  

Available even if you have less than perfect credit

PCP offers the chance for anyone with less than perfect credit to get approved for finance. If you’re worried about a poor credit rating affecting your chances of approval, check your eligibility using our soft search Apply Now feature for a fast decision on finance (this will not affect your credit score).

the pros and cons of pcp

Disadvantages of PCP

Large Balloon Payment if you want to buy the car

If you want to buy the car at the end of the term, you will need to make a final balloon payment. This sum is usually large and could require a loan if you can’t afford to pay upfront. Also, if your car isn’t worth its predicted GMFV, you’ll have to cover the cost in difference if you part exchange the vehicle (negative equity).

Less flexible, with mileage restrictions

The annual mileage limit you choose at the start of your agreement will affect your fixed monthly payment. This restriction may be a hindrance to anyone who uses their vehicle to drive long distances. Or if you are likely to take unpredictable routes and trips throughout the year. If you choose lower mileage, your payments will be lower – higher mileage equals higher payments. And if you go over your annual mileage limit you will be required to pay the extra. 

Face charges if the car is damaged

From the start of your agreement, you are liable for the full amount of the vehicle. You must keep it in good condition. You will be required to pay for any damages to the vehicle at the end of your term, or if you settle early.

Tied in for the full term 

Traditionally, a PCP deal will tie you in for the entirety of its term. However, depending on the contract, you can settle your deal early provided you have paid at least 50% of the total cost of finance – half of all the monthly payments including interest. This is known as Voluntary Termination. 

Credit rating affects interest rate

Typical APRs on PCP deals start from around 4% though some dealers may offer 0% interest. These deals are likely to include recuperation of losses elsewhere – like in an inflated balloon payment. 

Is Personal Contract Purchase the right option for me? 

Personal Contract Purchase is a flexible way to drive the car of your dreams without having to put up a large sum of money upfront.  

Weigh up the advantages and disadvantages of PCP against your personal requirements, and use these points to make an informed decision. 

Advantages of PCP

  • Lower fixed monthly payments as you’re only paying the vehicle’s depreciation cost plus interest.
  • Choose the length of the agreement term that works for you (from 24 to 48 months).
  • Part-exchange the car for a new one at the end of your agreement.
  • Return the car to the finance company if you don’t want to buy it.
  • Change cars every few years and drive the latest vehicles.
  • Positive equity if your car is worth more than its predicted GMFV.
  • Zero deposit option with us.
  • Better chance for acceptance in comparison to other types of finance, even with poor credit.

Disadvantages of PCP

  • No option to own the car until the end, and then there is a large balloon payment if you do want to buy the car.
  • Annual mileage restrictions with excess charges if you exceed the limit.
  • If the car isn’t worth its predicted GMFV at the end of the term, you will have to cover the cost if you choose to part exchange.
  • Tied into the full term of the agreement, with no option to change your car until the end.
  • Interest rates depend on your credit rating.
  • Charges to pay if the car has any damage and is not in an acceptable condition.

Get in touch today and speak to a member of our team to find out more about PCP, or see if it works for you. We are available to answer all your questions and find you the best deals.

Alternatively, if you’ve decided that PCP is for you, and want to see if you’ll be approved without affecting your credit score, you can use our quick and easy online Apply Now form.

Apply for a lease car now

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