Personal Contract Purchase (PCP) finance guide
Personal Contract Purchase (PCP) is a finance plan that can be used to buy either a new or an Approved Used car. But how does it work, and is it the right choice for you? Read our guide below to learn more.
Mon Motors PCP deals
What is Personal Contract Purchase (PCP)?
Buying a car or van on finance can be a convenient way of securing a new vehicle, because it helps to spread the cost over a longer period of time compared to paying out in full.
Personal Contract Purchase – known more simply as PCP – is a popular type of car finance, typically available when buying not just a new car or van but an Approved Used vehicle, too.
It often involves paying a deposit followed by fixed monthly payments and typically lasts between 24 and 48 months. It is just one of several finance products available to potential new and Approved Used car buyers, so it’s important to understand exactly how it works before making a decision.
You can find PCP deals available on all the brands we represent at Mon Motors - including Audi, Volkswagen, Škoda, SEAT, Ford, Volvo, CUPRA, Volkswagen Commercial Vehicles and Ford Commercial Vehicles.
Understanding Personal Contract Purchase
How does PCP finance work?
PCP can appear more complex than other finance products, such as Hire Purchase (HP), but once explained it is straightforward to understand.
With a PCP deal, you’ll pay a deposit first (typically 10% of the total value), followed by fixed monthly payments for however long the agreement runs for. This is usually down to customer choice, and is typically anywhere from two to four years (24 - 48 months). Most PCP agreements won’t run longer than 49 months, or four years and one month.
At the start of your PCP agreement, the dealership, in partnership with the finance company, will calculate what’s known as an ‘optional final payment’ (sometimes called a balloon payment, or Guaranteed Minimum Future Value, GMFV). This figure represents the car’s estimated value at the end of the agreement. For example, on a three-year agreement, it represents the projected price of the car three years later, based on its expected depreciation.
What you pay back, over those three years, is the difference between the cost of the car as brand new, and what the optional final payment is, with the rate of interest included, too.
PCP agreements also include an agreed annual mileage allowance, commonly 8,000 or 10,000 miles, but this may be higher or lower depending on the terms of the contract. Where the agreed mileage is exceeded, an excess mileage charge will apply, the rate of which is specified in the finance agreement.
Some PCP offers are available with 0% finance, giving you the option to spread the cost without paying any interest. Learn more about 0% finance here.
What to expect when your PCP agreement ends
What happens at the end of a PCP agreement?
One of the advantages of a PCP agreement is that it’s a flexible finance product that helps you keep your options open. There’s no commitment to buying the vehicle. Instead, at the end of the PCP contract, you have three options:
1. Buy the car outright by paying the optional final payment. Remember, the price to buy the car will have been confirmed at the start of the agreement. You’ll need to have the funds readily available should you wish to purchase the vehicle. You may be able to refinance the optional final payment.
2. If you choose not to purchase the vehicle, you can part exchange it for a new one. If at the end of the agreement the trade-in market value of the car is higher than the optional final payment, you can use the difference as a part deposit towards the new vehicle, reducing your monthly payments.
3. Lastly, you can choose to return the vehicle with no further obligations, providing there’s no excess mileage charges to pay, and it meets fair wear and tear standards. If the car requires repairs or has exceeded the agreed mileage limit, you will be responsible for covering these costs when returning the vehicle to the finance provider.
