Here at Carbase, we understand that vehicle finance can be confusing, especially if you're in the market for your first set of wheels or you have never used finance to buy a car or van before.
That's why we make every effort to provide up to date information and advice about vehicle finance and the options available to you, including Personal Contract Purchase (PCP) finance.
This is our latest guide to PCP finance - what exactly it is, how it works, when and why it could be the right type of vehicle finance for you, as well as the potential risks to be aware of.
Not everyone has the spare cash to pay for their dream car outright. However, there are a range of other finance options that allow motorists to get behind the wheel of a new used car without paying for it in full. One of these is PCP finance.
Known as Personal Contract Purchase, PCP is a type of loan that allows you to purchase a car. It's important to note that with PCP finance, you won't own the car at the end of the finance agreement unless you choose to pay the balloon payment.
PCP is a popular option to finance a car, but it can be difficult to understand. In fact, it's known as one of the most complex finance options on the market.
What is PCP finance?
First things first. Personal Contract Purchase, or PCP for short, is one of the two main types of finance deals designed to help you buy a vehicle. The other is Hire Purchase (HP) - we'll be publishing a guide on this type of vehicle finance shortly too, so watch this space.
Essentially, PCP is a loan that makes getting a car or van easier and more accessible. PCP finance can be used towards new or used cars or vans, and it has become by far the most popular way to access a vehicle in recent years.
It's pretty rare to be able to afford to buy a vehicle outright and, while any kind of personal loan can be spent on a new car or van, PCP and HP finance agreements are specifically designed to contribute towards a vehicle.
Unlike a normal loan, PCP doesn't involve paying off the total value of the vehicle and you won't own it outright at the end of the agreement - unless you choose to.
These are the three main elements of a PCP finance agreement:
You will need to pay a deposit at the beginning of a PCP agreement, which is usually around 10% of the vehicle's price. Although, if you pay a higher deposit, it may lower your monthly payments.
A PCP agreement typically lasts 24 or 36 months and over that time, rather than paying off the vehicle's full value, you'll pay off only a part of what it's worth at the time of purchase, minus the deposit and plus interest. A payment is taken every month.
A balloon payment
If you want to own the car or van outright, you will need to pay a final one-off balloon payment at the end of your PCP agreement. This is the minimum future value of the vehicle, which will have been agreed at the start of the deal. You'll only pay it if you want to keep the car - there are other options available (more on this later).
How does PCP finance work?
The best way to explain PCP finance is to break it down into three separate parts:
Paying your deposit
The vast majority of car dealerships will require a deposit equal to 10% of the total amount of the vehicle's value. And remember, the more you put down, the less you will need to borrow, which will in turn reduce your monthly payments.
Determining the amount you can borrow
The amount you can borrow is based on how much the finance company believes the car will decrease in value over the total term of the deal. The deposit you put down is deducted from this amount.
Understanding the balloon payment
At the end of the finance agreement, you can either give the car back or you can choose to pay the balloon payment and keep the vehicle. The balloon payment is usually the amount that the dealership expects your car to be worth once your finance agreement comes to an end.
For example, if you purchase a car for £20,000 and pay a 10% deposit of £2,000, you will be borrowing a total of £18,000. If your dealership decides at the end of your finance term that the car is now worth £10,000, you will have to pay a balloon payment of £8000 if you want to own the car.
PCP 0% finance explained
Many dealerships offer PCP 0% finance deals. But what is PCP 0% finance? This is basically a finance deal that allows you to enjoy the benefits of a PCP agreement, without having to worry about interest or charges.
Allowing you to spread the cost of a new car over a series of monthly payments, at no additional cost, a variety of dealerships are now using this type of offer as a way of generating sales.
PCP Finance Practical Example
The components of a PCP finance agreement may be simple enough, but it can be tricky to see how they work together until you have a real-world example.
Let's say you find a used car at Carbase that ticks all the boxes and you want to take out a PCP finance agreement on it over three years.
Your chosen car has a ticket price of £15,000, you have a deposit of £1,500 to put down and the lender calculates that, after the three-year agreement, the car will be worth at least £5,000. You'll need to pass a credit check in order to take out the PCP loan, and you need to be sure that you can afford the monthly payments.
If you are approved for PCP finance, you borrow only part of what the car is worth over the three-year term, which could look like this:
During the three-year PCP finance agreement
Your deposit - £1,500
Your loan - £8,500 (£10,000 - £1,500) plus interest, paid back in monthly instalments
At the end of the agreement
Balloon payment - £5,000 (if you want to keep the car and own it outright)
Deposit - £1,500
Loan - £8,500 (£10,000 - £1,500) plus interest
Balloon payment - £5,000
Total: £15,000 plus interest
Explore more PCP finance examples with our car finance calculator or van finance calculator. Simply enter a vehicle price and loan repayment term, and we'll show you what sort of monthly repayment you can expect to pay.
What happens if I don't want to keep the vehicle?
One of the best things about PCP finance is that paying the final balloon and owning your vehicle outright is just one of the options available to you at the end of your agreement.
If you don't want to keep your car or van, you can either:
Return the vehicle and walk away
You can simply give the vehicle back to the dealer you got it from, with nothing further to pay - subject to certain charges which may apply (more on this below).
Return the vehicle and get a new one
If your car or van is worth more than the balloon payment at the end of the loan term, you can use the extra as 'equity' towards a new PCP finance agreement.
Going back to our example above, say the vehicle is actually worth £6,000 at the end of the three-year agreement, not the balloon payment amount of £5,000 as the lender predicted. This means you have 'credit' of £1,000, which you can use as a deposit for a new PCP agreement on another car or van.
Most people opt to take out a new PCP agreement against another new or used vehicle, but it's completely up to you. If the vehicle ends up being worth less than the balloon payment, it may make more sense to return it.
Will I be charged to return the vehicle?
You could be - it depends on how you drive and look after the vehicle while you have it. If charges apply, you will need to pay them in both instances - whether you return the vehicle and walk away or return it and get another one.
As you only borrow and pay back a portion of the vehicle's value through a PCP agreement, you're effectively 'borrowing' it during the loan term; the dealer still owns it until you pay the final balloon payment.
This means that you will need to take good care of the vehicle so that it retains as much of its value as possible and is still of a standard that the dealer can sell on.
To help ensure this, a PCP agreement will usually include stipulations on how many miles you travel in it and how much damage it undergoes during the term of the agreement. Of course, staying within these parameters will also benefit you, since a vehicle that's worth more at the end of the loan term can help you take out another PCP deal.
As we all know, cars and vans with fewer miles are worth more than those with lots of miles on the clock.
At the start of a PCP agreement, you will be asked how many miles you'll cover in the vehicle each year of your loan duration. This figure will be agreed by both you and the lender at the outset and will form part of the terms and conditions.
Try to be as accurate as you can, as you will be charged 7-10 pence for every mile over this limit when you come to return the vehicle.
Normal wear and tear is to be expected, but you will have to pay to repair any significant scratches or dents that could affect the vehicle's resale value.
Rather than waiting until the end of the agreement, it's usually best to get any damage repaired as soon as it happens.
What if I want to finish my PCP agreement early?
Life is anything but predictable, and there may be circumstances that lead to you wanting to either cancel a PCP agreement early and return the vehicle, or buy it outright before the end of the loan term.
In either of these cases, you can return the vehicle to your dealer for a valuation and a settlement figure. The settlement figure is the amount you will need to pay to close the finance agreement and keep the car, if you choose to. With Carbase and Vanbase, we may also be able to offer you the option of part exchanging your vehicle.
Pros and cons of PCP finance
There are plenty of advantages to taking out PCP vehicle finance, but it's important to be aware of the potential risks and downsides too.
Advantages of PCP finance
Lower monthly payments - The balloon payment at the end of a PCP agreement means that you only borrow part of the vehicle's value, rather than all of it. This usually means lower monthly repayments than you would have to pay with a Hire Purchase finance agreement.
A guaranteed minimum future value - With PCP, you don't need to worry about the vehicle depreciating beyond a certain point; your lender will provide a guaranteed minimum value at the start of the agreement. If your vehicle loses more value than expected over the duration of the loan, you can simply return it.
Flexibility - PCP gives you options - you can choose to pay the final balloon payment and keep your vehicle for good, return the vehicle and walk away, or give the vehicle back and take out a new PCP agreement on another car or van.
Convenient maintenance - Some PCP agreements will give you the option to include a service and maintenance package for your vehicle, which enables you to get your total upkeep cost down to one monthly payment.
Disadvantages of PCP finance
You won't own the vehicle during the loan term - The vehicle won't belong to you until if and when you pay the final balloon payment.
Charges to return the vehicle - As we explained above, a PCP agreement will include mileage limits and damage penalties. If you want to return the vehicle, you may have to pay fees if you exceed the conditions you agree to at the outset of the loan term.
Uncertain equity - If there is little difference between the minimum future value and the actual value of the vehicle at the end of the agreement, you won't have much equity to use as a deposit on another PCP deal.
Is PCP finance right for me?
PCP finance can be a cost-effective and flexible route to a quality used car or van, but it's important to understand it fully in order to decide whether it's the best option for you.
Generally speaking, PCP is great for people who like to upgrade their vehicle regularly without high monthly payments, while it may not suit those who are happy to keep the same vehicle for longer, or want to own their vehicles at the end of a vehicle finance agreement. If you do decide to buy and keep the vehicle, PCP can work out as more expensive than Hire Purchase.
Ultimately, everyone's circumstances are different. Our friendly team at Carbase and Vanbase are dedicated to helping customers explore vehicle finance options honestly and impartially, so that you can drive away in your chosen used car or van with a finance agreement that comfortably fits your budget, lifestyle and future plans.
Ready to take the next step? View our current range of quality used cars and used vans to find your next vehicle, or come in and see us at one of our stores to learn more about PCP finance and how it could help you.
PCP car finance FAQs
Can you finance the final payment on PCP?
Yes, the optional final payment on a PCP finance agreement can be refinanced. If this is the right option for you, the terms and conditions of the new agreement will need to be agreed with your finance company or dealership. ?
Can you pay off finance on PCP early?
Yes, you can settle a PCP finance agreement at any stage of the term by agreeing to pay the settlement figure. ?
Will I be accepted for PCP car finance?
A soft search will give you an idea of whether or not you are likely to be accepted for a PCP car finance agreement. ?
What do I need for PCP finance?
When applying for PCP finance, you will need to provide a number of personal details, including employment details and history and your bank details. You will also have to present your driving licence.
Can an 18-year-old get PCP finance?
Yes, an 18-year-old is able to apply for PCP finance. ?
Can I change from HP to PCP car finance?
Yes, you can. However, you will need to get a finance settlement figure from your lender first. ?
Car finance at Carbase
Here at Carbase, we keep car finance simple to understand and quick to apply for, and we also offer financial solutions for those drivers with bad credit.
For example, as well PCP options, we also offer Hire Purchase finance, which has been designed to offer affordable monthly car finance payments with a fixed interest rate.
All that is required is a deposit and your terms can even be adjusted to suit your financial situation based on your circumstances. The finance will still be against the vehicle and the agreement can be settled at any time. And at the end of the agreement term, the vehicle will be yours!
Need help with any part of the car buying or PCP finance process? Get in touch with our expert team today! Our friendly, professional and helpful team is always on hand to help.