A PCP (Personal Contract Purchase) is a popular car financing method where you pay a deposit followed by monthly payments, but unlike a loan, you don't necessarily pay for the entire value of the car. The key feature is a large "balloon payment" at the end of the term if you decide to own the car outright. Most people either return the car or use its equity as a deposit on a new PCP deal.
Your monthly payments are calculated based on the car's depreciation (the value it loses) over the contract term, plus interest. A central concept is the Guaranteed Future Value (GFV), which is the car's predicted value at the end of the agreement, set by the finance company at the start. Your monthly payments cover the difference between the initial price (minus your deposit) and this GFV.
At the end of the term, you typically have three options:
- Return the Car: You can simply hand the car back, provided you've stayed within the agreed mileage limit and the vehicle is in good condition, with no further financial obligation (though excess mileage and wear-and-tear fees may apply).
- Make the Balloon Payment: Pay the GFV to own the car outright.
- Part-Exchange: Use any equity (if the car's actual market value is higher than the GFV) as a deposit on a new car with another PCP deal.
PCP agreements are attractive because they often feature lower monthly payments compared to a traditional loan, making newer or more expensive cars appear more affordable. However, you never build equity unless you make the final payment. It's crucial to understand the terms, including the Annual Percentage Rate (APR), mileage limits, and condition guidelines.
| Feature | Typical PCP Agreement Details | Why It Matters |
|---|
| Contract Length | 36 or 48 months | Defines the commitment period. |
| Initial Deposit | 10% - 20% of car's value | A higher deposit lowers monthly payments. |
| Mileage Limit | 10,000 - 15,000 miles per year | Exceeding this limit incurs significant fees (e.g., $0.15/mile). |
| Annual Percentage Rate (APR) | 3.9% - 10.9% (varies by credit) | The cost of borrowing; a lower APR saves money. |
| Excess Wear & Tear | Defined by BVRLA/CBA standards | Dings, scratches, or tire wear beyond "fair" can result in charges. |
| Guaranteed Future Value | Set by lender at contract start | Determines the final "balloon payment" and your monthly cost. |
