Buying a car with Personal Contract Purchase (PCP)

A PCP is a contract that gives you access to a car, with the option to buy it at the end of the deal. 

There are three main parts to a PCP:

• a deposit, which you’ll pay at the beginning of the contract
• monthly payments, which cover the value of the car (minus your deposit and the balloon payment), plus interest
• a ‘balloon payment’, which is a large one-off payment at the end of the contract to cover the rest of the car’s cost. This is optional, but you have to pay it if you want to buy the car outright.

You’ll agree a contract length with your dealer, which will usually be between three and five years. During this time you’ll have full use of the car, but won’t own it.

You’ll usually need to pay a deposit of at least 10% of the car’s value. You’ll pay this when agreeing the PCP.

A higher deposit will reduce your monthly payments.

The balloon payment is the amount you’ll have to pay at the end of the contract if you want to own the car outright. This amount is set by the finance company at the start of the deal.

The amount you’ll pay is based on an estimate of the car’s value by the end of the contract. This is called the Guaranteed Minimum Future Value (GMFV).

Paying the balloon payment is completely optional, but you won’t own the car if you don’t. Learn more about your options when reaching the end of a PCP

You’ll make monthly payments for the length of your contract. These payments are based on the value of the car, after you take out the deposit and the balloon payment.

You’ll be charged interest as well, but this is based on the whole value of the car (minus your deposit).

Although you won’t own the car, you’ll be responsible for:

• insurance
• fuel
• repairs and maintenance
• any parking or speeding tickets.

Make sure you budget for all of these, including unexpected costs such as replacing a tyre.

In total, you’ll be paying the £10,000, and about £2,500 more in interest.

You’ll then need to pay another £7,000 at the end of your contract if you want to own the car. In total, you’ll have paid £22,500 for the car (not including insurance and running costs).

This is just an example, and your deal could have very different numbers – so make sure you understand how much you’ll pay at each stage. There’s a PCP calculatorOpens in a new window on The Money Calculator that can give you an idea of what you’ll pay.

PCPs are quite complicated, and it’s not always clear how much you’ll be paying for your car.

If you don’t understand the deal you’re being offered, ask your dealer to explain it. They should make everything clear – if they don’t, be ready to walk away.

• How much is the deposit?
• How much is the balloon payment?
• What will your monthly payments be?
• How much are you paying in interest?
• What is the Annual Percentage Rate (APR)?
• Will you get the advertised APR? Or is this representative APR, meaning you might not get the advertised rate?
• What are you paying in total?
• What is the length of the contract?
• What is your mileage limit, and what will it cost you if you go over it?
• What counts as ‘wear and tear’, and what counts as ‘damage’?
• What are the terms and conditions of the contract?
• Are there any other fees to be aware of?
• What happens if you need to return the car early? 

When you agree a PCP, you’ll be set a limit on how many miles your car is allowed to do annually. This is usually 10,000 miles.

You can negotiate this, but a higher mileage allowance will mean higher monthly payments. This is because your car will be less valuable if it has more miles on it when you reach the end of your PCP.

Make sure you agree a mileage allowance that works for you, and don’t go over it – most contracts will come with penalties if you go over, and these can get expensive if you’re not careful.

Some dealers will offer optional extras that aren’t normally in a PCP, such as insurance, breakdown cover and warranties.

Make sure you understand exactly what your dealer is offering you, and how it’ll affect your monthly payments.

When buying a car you might be offered gap insurance, which covers you if your car is written off or stolen, and you end up owing your dealer more than you’d get from an insurance payout.

Make sure you know what this is and if you need it - and always check you’re getting a fair deal .

You’ll need to pass a credit check when applying for a PCP. This will be a ‘hard search’, which means a mark is left on your credit file.

If you’re worried about your credit, view our guide How to improve your credit score.

Once you get to the end of your contract, you will have a few options for what to do next:

• pay the balloon payment and buy the car outright
• hand the car back to the dealer
• agree a PCP on a new car with your dealer.

If you’re handing the car back, the dealer will check it over for any damage and make sure you haven’t gone over the mileage limit. If they spot anything wrong, you might have to pay a penalty.

There’s more information about what happens at the end of a PCPOpens in a new window on The Car Expert.

You’ll be given the option to agree a new PCP with your dealer. You’ll need to pass another credit check before you can start a new agreement.

If the car you’re handing back is worth more than the GMFV agreed at the start of the contract, you can use the difference as part of your deposit for a new car. However, you won’t be able to transfer this to another dealer.

Dealers are looking to keep you locked in with new deals, so think carefully about whether a new PCP is right for you.

If you don't want to make the balloon payment at the end of your contract, one option your dealer might offer you is to refinance it with another PCP.

You'll be entering a new contract which will allow you to keep your existing car. You'll still have a balloon payment to make at the end of this deal, and monthly payments are likely to be similar to your previous deal.

Your dealer is more likely to try and shift you to a newer car. Think carefully about what the best option is for you.

Like all deals, a PCP comes with advantages and disadvantages. Whether it’s the right deal depends on the kind of car you need, and your own money situation.

If you have enough savings to be able to buy a car with cash, this will usually be your best option. You’ll pay no interest and will immediately own the car.

It’s important to still have some money for emergencies. View our guide Emergency savings – how much is enough.

Think about whether a cheaper car would suit your needs.

New cars lose their value (depreciate) quickly, so at the end of a PCP you’ll probably have a car that’s a lot less valuable.

Older cars usually depreciate less, so are sometimes better value in the long run. However, some cars will have higher running costs and may be more likely to need repairs and maintenance.

There’s lots to consider when working out overall car costs. Our guide Costs of buying and running a car talks about this in more detail.

Another option is a Personal Contract Hire (PCH). You won’t be able to buy the car with this option, but your monthly payments will usually be lower.

If you don’t think you’ll make the balloon payment at the end of a PCP, hiring might be a better deal. However, not all dealers will offer this option.

If you want to own the car outright, you could get a personal loan to pay for it.

You’ll need to compare what you can borrow and how much you would be paying back. Your monthly payments will probably be higher, but you might pay less in interest overall.

Be aware that a personal loan might not be secured against your car, so if you struggle to repay it your lender won’t simply take your car away to make things even. You also won’t be able to end the deal early.

A Hire Purchase is another way of buying a car outright. You’ll put down a deposit and make monthly payments to cover the value of the rest of the car.

These monthly payments will likely be higher than a PCP, but you usually won’t have to make a balloon payment at the end of the contract – you’ll own the car as soon as you make the final monthly payment.

Dealers don’t offer this option very often, so you might need to ask about it.

If you need to end a PCP early, you have a few options.

You can usually return a car and get a full refund within the first 30 days if there’s a fault. This is part of your consumer rights – you can learn more about this in our guide Consumer rights – what you need to know.

Speak to your dealer as soon as possible if there’s something wrong with your car.

It’s important to talk to your car finance company if you’re finding it difficult to keep up with payments.

They might be able to extend your agreement, which can lower your monthly payments. They can also consider other arrangements, so having a conversation with them can be a good place to start.

It’s important to have this conversation before missing any payments. If you don’t, your dealer may view it as you defaulting on your payments, which could affect your credit rating.

Find out  where you can get free debt advice.

You might have heard of voluntary termination, which is a rule that gives you the legal right to end a contract once you've paid 50% of its value.

This rule does apply to PCP contracts as well. But keep in mind, the contract's value includes the balloon payment. This means that you probably won't have the right to voluntary termination until close to the end of your deal.

If you have paid half the contract value, you can use voluntary termination to end your deal. Be aware that your car will return to the dealer and you won’t get any money back.

You can use this letter templateOpens in a new window on National Debtline to apply for voluntary termination. Learn more about voluntary termination of a PCPOpens in a new window on The Car Expert.

Speak to your dealer about ending the PCP early – this is called ‘early settlement’. They’ll give you one final larger payment to make, and then the car will be yours.

This can be a good way to finish the contract and pay a bit less interest, but there are usually some admin fees so think about whether this works out as a good deal.