PCP is short for Personal Contract Purchase and is a way of spreading the cost of a car over a period of two to four years. You’ll pay a deposit, a series of monthly payments, and an optional final payment if you want to keep the vehicle at the end of the loan. Typically, the payments will be lower than other forms of finance.
That’s because – unlike with a bank loan where you pay off the total cost of the car – with PCP you just pay for the depreciation. In other words, the amount between what the car is worth at the start and end of the term. So long as the car is in good condition, hasn’t done more miles than agreed, and has been serviced regularly, you can just hand back the keys at the end of the contract or part exchange it for another car. Contrary to popular belief though you don’t need to take the car back to the dealership or even manufacturer you got it from.
PCP finance is flexible
Unlike Personal Contract Hire (referred to as PCH or leasing) and Hire Purchase you can choose whether to keep the car or hand it back.
Dealers keen to get people into new cars will also offer discounts on PCP, including large deposit contributions, to shrink your monthly payments.
Make sure you know what sort of finance schemes you’re signing up for though as dealers can give them their own name – such as Solutions, Dimensions, i-Deal and Aspirations.
What is equity?
Typically speaking, a car valuation is likely to decrease fastest from the moment you drive it away from the forecourt. This then slows down as the vehicle ages over the course of your contract.
Usually, PCP finance deals start off in a position of negative equity – that is, where the outstanding debt outweighs the car’s value.
As time goes on, the contract progresses and the car’s depreciation slows down, and so the fixed monthly payments reduce the amount of debt until in most cases, the car is then worth more than the amount you have left to pay. This effectively leaves you with some extra cash in your pocket.
In fact, most PCP schemes are calculated to deliberation leave you with some equity towards the end of the contract. You can then use this towards the deposit for a new car on another PCP contract.e
How to cut your monthly payments
Many things affect the amount you pay per month, not just the list price of the car.
- Depreciation – the faster the car drops in value, the more you’ll pay.
- Deposit/ contribution – the more you/the dealer pays at the start, the less you’ll pay each month.
- Contract length – the longer the contract, the less you’ll pay each month. You’ll also end up paying more interest, though.
- Mileage limit – the lower this is, the less you’ll pay. Go over the limit though and excess mileage charges will soon rack up.
- APR/interest charges – higher interest means higher payments – this can vary from 0% to around 7.9% for new cars
