How does Personal Contract Purchase (PCP) car finance work?
Find out all about PCP deals as we explain how financing a car works
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PCP finance explained - how does finance work on a car?
Personal Contract Purchase (known as PCP) is a type of car finance that considers the depreciation of your car over the length of your contract.
At the end of your contract, you can decide whether to pay the lump sum ‘balloon payment’ and purchase the vehicle outright, or hand it back and get something new.
What is PCP car finance?
PCP finance covers the depreciation of the vehicle over the length of the agreement, so the cost of your deal will be based on what your car will be worth when that contract comes to an end – otherwise known as the Residual Value (RV) or Guaranteed Minimum Future Value (GMFV).
At the end of the term, you’ll then have the option to buy the car for a pre-agreed 'Optional Final Payment' figure.
This kind of finance is available on many of cinch’s cars, and depends on the age, mileage, and term of the contract.
How is PCP car finance calculated?
When you enter into a PCP agreement, the finance company will estimate how much your car will be worth at the end of your contract by considering things like your predicted annual mileage and the age of the vehicle.
This estimate is known as the RV/GMFV and helps set out how much you’ll need to pay.
Throughout your contract, you’ll be covering the difference between the cost of the car and the predicted RV/GMFV. This amount will be split across your monthly payments.
The interest rate you’re offered will depend on your individual circumstances, such as your credit history and how much deposit you’re paying.
Is PCP car finance a good idea?
These finance deals are popular as they're usually much cheaper on a monthly basis than other types of car finance deals.
Over the contracted period, you won't be paying the full value of the car, and you’ll get the option to stick or switch at the end of your contract. It’s a great way to try a car before deciding if you want to buy it.
If you like to change up your car every few years, it can be a great option.
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What are the risks of PCP car finance?
Going over your mileage allowance
Most PCP agreements come with a mileage allowance, so you’ll need to estimate that when applying – be as accurate as you can, because you’ll end up paying more if you go over this amount
Damage charges
If you’re planning on handing your car back at the end of your contract, it’s important to return in tip-top condition. Any damage to your car – including dents, curbed alloys, bird lime damage – is likely to be subject to extra charges, though there are exceptions for fair wear and tear.
How does PCP work at the end of the term?
When your car deal is coming to an end, you’ll need to think about whether you want to keep your car.
Can't bear to let it go? You'll be able to purchase the vehicle by paying a ‘balloon payment’.
This is a lump sum amount that’s equal to your GMFV – so the amount predicted at the start of your contract based on your car’s depreciation. If you do this, you’ll be the new owner of your car.
If you decide it’s time for you and your car to go your separate ways, you can simply hand it back and skip out on the balloon payment, or part-exchange for something new.
You might even find that your car finishes the contract with a higher value than the RV/GMFV predicted – great news! That means you can use the equity in the car towards the cost of a shiny new one.
What if I want to end my PCP car finance contract early?
We know circumstances change and you might be in a position where you’d like to return your car before the end of your contract.
Most of the time, you can get in touch and find out how much a settlement fee would be.
This is a lump sum that will pay off the remaining balance and end your finance deal early.
The key points of PCP car finance explained:
Monthly fixed payments will account for the value your vehicle will lose over the period that you’re using it (the RV/GMFV), so they’re usually cheaper than other types of finance.
At the end of your contract, you can choose to pay the RV/GMFV balloon payment and keep your car as the new owner.
You might also decide to hand your car back and not pay the balloon payment.
If your car has a higher RV/GMFV than predicted, you can use this equity to part-exchange for a new model.
Frequently asked questions about PCP:
What does PCP stand for?
'PCP' stands for Personal Contract Purchase.
How does PCP car finance work?
PCP car finance works by allowing the depreciation amount of the car to be spread across a deposit and monthly repayments (plus interest). There's then the optional final payment at the end of the contract.
Is PCP car finance a good idea?
Only the individual will know if PCP car finance is a good idea for their own personal circumstances. The finance provider will have the final say on whether it can offer finance. This will depend on factors like affordability and credit history.