Personal contract purchase (PCP) is the UK’s most popular way to finance a new car, and also the one that confuses people most. You pay a deposit and monthly payments, but a large chunk of the car’s value is deferred to an optional final payment. This guide explains how that works, with a worked example, plus mileage limits and your options at the end.
In short
With PCP, you pay a deposit and lower monthly payments, because part of the car’s cost is deferred until the end. At the end of the agreement, you choose between paying the final payment to keep the car, handing it back, or part-exchanging it for another car.
What is PCP car finance?
PCP is a type of car finance where the lender works out how much the car is likely to be worth at the end of your agreement. That figure is called the guaranteed minimum future value (GMFV), and it becomes your optional final payment, sometimes called the balloon payment.
Your monthly payments mainly cover the difference between the car’s price and that future value, plus interest on the whole amount you borrow. Because you’re not paying off the full price through monthly payments, they’re lower than with hire purchase.
As with HP, the lender owns the car during the agreement. It only becomes yours if you pay the final payment.
How PCP works: deposit, monthly payments and final payment
A PCP agreement has three parts:
- Deposit. Paid at the start, in cash, part-exchange or both.
- Monthly payments. Paid for the term of the agreement, usually two to four years.
- Optional final payment. Equal to the guaranteed minimum future value, due only if you want to keep the car.
Worked example
A car costs £20,000. You pay a £2,000 deposit and borrow £18,000 over 36 months at an illustrative APR of 10.9%. The lender sets the final payment at £8,000.
- Monthly payment: about £393.78
- Paid through monthly payments: about £14,176
- If you pay the final payment to keep the car, the total is about £24,176 including the deposit.
On standard HP over the same term, the monthly payment would be about £584.12 and the total about £23,028. PCP costs less each month, but more overall if you keep the car, because you pay interest on the deferred £8,000 throughout. These figures ignore fees and are not a quote.
What are your options at the end of a PCP?
When your agreement ends, you normally have three choices:
- Pay the final payment and keep the car. You can pay with savings, or you may be able to refinance the final payment with a new loan.
- Hand the car back. You owe nothing more, as long as you’re within the mileage limit and the car is in the agreed condition. See handing back a PCP car.
- Part-exchange it. If the car is worth more than the final payment, that difference, called equity, can go towards the deposit on your next car.
Our guide to end-of-agreement options compares these in more detail.
Mileage limits and excess mileage charges
When you take out a PCP, you agree an annual mileage limit. The lender uses it to set the future value, because higher-mileage cars are worth less. A higher limit usually means a lower final payment and higher monthly payments.
If you hand the car back having driven more than the agreed total, you’ll pay an excess mileage charge for every mile over. The rate per mile is set out in your agreement and often ranges from a few pence to over 10p a mile, depending on the car. For example, at 8p a mile, 3,000 miles over the limit would cost £240. If you pay the final payment and keep the car, the mileage limit no longer matters.
Pros and cons of PCP
| Pros | Cons |
|---|---|
| Lower monthly payments than HP for the same car | Usually costs more overall if you keep the car |
| Flexibility at the end: keep, hand back or part-exchange | Mileage limits, with charges for going over |
| Lets you change cars every few years | Damage beyond fair wear and tear is charged if you hand back |
| The final payment is fixed, protecting you if the car’s value falls | You don’t own the car unless you pay the final payment |
PCP vs HP
PCP keeps monthly payments down and gives you choices at the end, which suits people who change cars every few years. HP costs more each month but usually less overall, with no mileage limit and no large final payment, which suits people who want to keep the car. If you’re likely to keep the car anyway, compare the total amount payable on both. Our hire purchase guide has a side-by-side comparison.
PCP car finance FAQs
What happens if I go over my PCP mileage?
If you hand the car back, you’ll pay the excess mileage charge in your agreement for every mile over the limit. If you know early that you’ll exceed it, ask the lender whether you can change the limit, which may be cheaper than paying the charge at the end.
What if the car is damaged when I hand it back?
You’ll be charged for damage beyond fair wear and tear. Most lenders follow industry standards set out by the BVRLA (British Vehicle Rental and Leasing Association). Repairing minor damage yourself before the inspection can sometimes cost less.
Can I end a PCP early?
Yes. You can settle the agreement early by paying a settlement figure, part-exchange the car, or, once you’ve paid half the total amount payable, use voluntary termination to hand it back. See our guide to voluntary termination.
What is negative equity on PCP?
Negative equity means you owe more than the car is worth. With PCP, if the car’s value falls below the final payment, you can usually hand it back rather than pay the difference, which is one of PCP’s protections. Negative equity mainly becomes a problem if you want to end the agreement early or roll it into a new deal. See negative equity on car finance.