What is personal contract purchase and how does it work?

Date Posted 13th April 2017
Read Time 7 min read

Personal contract purchase (PCP) is the most popular car finance option in the UK thanks to its flexibility and fixed, low monthly payments.

What is Personal Contract Purchase?

PCP is a type of car financing product that allows you to spread the cost of your vehicle over a set amount of time.

Much like typical finance agreements, you make a deposit – if you wish – followed by monthly payments until the contract comes to an end. 

However, unlike a standard car loan, you won’t be paying off the full value of the car, so you won’t own it at the end of the agreement. Instead, you have three choices:

  • Hand the car back and walk away with no further obligations
  • Make a balloon payment (a lump sum payment) to keep the car
  • Part exchange and use any equity left to put down a deposit on your next PCP deal

How much does Personal Contract Purchase cost?

Personal contract purchase is one of the more complicated types of car finance to understand, but it can be split into three parts.

The deposit

As with most types of finance, you can choose to put down a deposit. This is usually around 10% of the car’s value. If put down a bigger deposit, the lower your monthly payments will be, but at Hippo Leasing, all our vehicles come with a £0 deposit option.

Monthly payments

The monthly payments you make on a PCP deal are lower than some other types of car finance, such as hire purchase, because you’re not paying for the full cost of the car. 

Instead, your payments cover the depreciation of the vehicle, plus interest. The depreciation is the difference between the car’s price when you start your agreement and the predicted value at the end.

Usually, PCP agreements run from around three to five years. If you want the lowest possible monthly payments, you should usually choose a longer term, as the cost will be spread out further. 

However, remember, the longer the term, the more you’ll pay in interest overall.

Something else that affects your monthly payments is mileage. 

At the start of your contract, you’ll be asked to estimate your annual mileage. This is so the car’s future value can be calculated – as a car that’s done more miles will be worth less. 

Less mileage means lower monthly payments, but be careful as if you underestimate and go over your mileage, you’ll be charged at the end of the contract if you decide to hand the vehicle back. 

The optional final payment

If you decide at the end of your agreement that you’d like to keep the car, you’ll be asked to make a lump sum payment (also known as the balloon payment) to do so.

The balloon payment is based on what the car is expected to be worth at the end of your contract – the Guaranteed Minimum Future Value (GMFV). 

Of course, you don’t have to pay this – it’s only if you want to become the legal owner of the car once your contract is finished.

What happens at the end of a personal contract purchase agreement? 

At the end of a personal contract purchase agreement, if you’ve not exceeded the mileage allowance and the car is in good condition, you can hand it back without any further payments.

If your car needs any repairs outside the usual wear and tear, though, you may be required to pay an additional charge for it. Also, if you’ve gone over your agreed annual mileage allowance, you’ll incur an additional cost.

If you want to keep the car, you’ll need to make a final payment based on the Guaranteed Minimum Future Value (GMFV). This is usually much more than your normal monthly payment, so it’s important to factor it into your budget from the start.

Alternatively, the most common option taken is simply trading your vehicle in for another. 

Pros and cons of personal contract purchase

PCP deals are popular for a variety of reasons, from flexibility to low costs. It’s not right for everyone, though, so it’s important to weigh up the advantages and disadvantages before you make your decision.

Pros Of PCP

  • Typically lower monthly repayments than some other types of car finance
  • Get a more expensive car than you may otherwise be able to afford
  • Protection against depreciation if you opt to hand the car back at the end of the agreement
  • Flexibility to change cars every few years
  • Can often opt for a maintenance package to be incorporated into your monthly payments

Cons Of PCP

  • Don’t own the car until you pay the final balloon payment
  • Penalties for damage to the car can be high if you choose to hand it back at the end
  • Limits on annual mileage and penalties for exceeding them if you choose to hand it back at the end
  • If you choose not to purchase the car at the end, it can be more costly than leasing

Personal contract purchase vs hire purchase

With both personal contract purchase (PCP) and hire purchase (HP), you can choose to make a deposit at the start of your agreement if you wish. This is then followed by fixed monthly payments over an agreed period of time. 

The difference between the two is that with HP, your monthly payments are repayments – they go towards settling the full value of the car. PCP monthly payments only cover a portion of the total value of your car.

Once you’ve made the final payment on your hire purchase agreement, you legally own the car. However, when the term ends on a PCP deal, you don’t own the car unless you decide to make the optional final balloon payment.

With a hire purchase agreement, you won’t need to estimate your mileage or be subject to additional charges. 

Depreciation is something to factor in, though, as unlike a PCP, if you ever want to change your car after you’ve paid off your finance, you’ll have to sell or part-exchange it. 

However, the biggest difference is cost. As you’re only paying for a portion of the vehicle, your monthly payments are usually considerably lower on PCP vs HP. 

Personal contract purchase (PCP) vs Personal contract hire (PCH)

Personal contract purchase and personal contract hire are, at first glance, almost identical. 

They offer low, fixed monthly payments, have mileage restrictions, and you can opt for maintenance packages on both types of agreement. 

Both offer short terms, but PCP contracts can be longer if you prefer.

The difference between the two kicks in at the end. PCH is leasing in its purest form. You never have the option to own the car.

PCP gives you more flexbility at the end of your agreement, meaning if you do want to purchase the car, you can.

While both PCH and PCP appeal to those who don’t want to own a car and are instead looking for cheaper monthly payments than traditional car finance, PCP can be a little more expensive due to the additional option to own a car.

Finally, PCH is generally available only with newer cars, while with PCP you have more options when it comes to used vehicles, which can also bring the costs down.

Who is personal contract purchase right for? 

The popularity of personal contract purchase speaks for itself. However, like all types of finance, it isn’t always right for everyone.

Your decision should ultimately be based on your own financial circumstances, as well as your needs and wants around car ownership.

PCP works well for those who have a slightly tighter budget or are simply looking to keep their monthly car outgoings as low as possible, rather than investing their money into a depreciating asset. 

With low, fixed monthly costs, this type of finance means you can access a better car for your budget. 

As it’s flexible, you can choose to change cars more regularly than you would with hire purchase for instance. 

However, you also have more choice of whether to become a car owner or to carry on with another flexible deal at the end of the agreement. 

So, is PCP suitable for you? If so, check out our best PCP deals using the button below. 

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