More people than ever are choosing the finance their next car through Personal Contract Purchase. PCP is a popular choice for low monthly payments and flexibility to get the car you want within your budget.
PCP can be good for people who aren’t precious bout owning their car at the end of the deal. However, PCP car finance deals don’t suit everyone and there are a few factors you should consider before you commit to signing on the dotted line.
The guide below has been designed to explain what PCP is and how it works and the pros and cons of getting your next car through personal contract purchase. Let’s take a look.
How does PCP car finance work?
Personal Contract Purchase is a form of Hire Purchase. PCP is a straightforward car finance deal that lets you spread the cost of your next car. Your monthly payments don’t cover the full cost of the car so there’s a large balloon payment at the end.
If you want to keep the car, you will need to pay or refinance the balloon payment. Alternatively, you can choose to hand the car back to the dealer or use the value of your deal towards a new car on PCP.
What are the benefits of getting a car through PCP?
1. Low monthly payments
One of the biggest benefits of getting a car through PCP is the low monthly payments. PCP car deals tend to have lower payments so you don’t spread the cost of the car and instead pay for part of it and the amount you pay goes towards the depreciation of your vehicle.
PCP deals can be a great choice for those who want to keep costs low whilst also getting a new or used car. Used car PCP monthly payments can be even lower as most of the depreciation happens in the first few years of the car being manufactured.
2. Available on a range of cars
When PCP first hit the market, it was only available on new cars. However, you can now finance a used car through PCP, get an electric car or get a hybrid car on finance too!
For many people, it also allows drivers to get a better car than they would with cash or through hire purchase because the monthly payments are lower. You could pay the same for a brand-new car or a used car on hire purchase if you’re focusing on monthly payment rather than added interest.
3. Don’t have to own the car
PCP doesn’t cover the full cost of your chosen car, so it gives the buyer more flexibility. Within a PCP deal, many consumers choose to hand the car back to the dealer instead of paying the large balloon payment.
This means you are essentially hiring the car throughout your agreement and don’t have to own the car if you don’t want to. If you like getting a new car regular, PCP could be the right choice for you.
4. Flexible loan terms
When it comes to getting a car on finance, PCP can be one of the most flexible options. You can choose how much you put down and there are many 0 deposit deals too or you can put in more and lower your monthly payments even further.
You can also choose how long you back your car finance over too. You can spread the cost over 1-5 years and choose a term that suits you. A longer term can lower your monthly payments but may increase the interest rate so it’s worth comparing deals.
What to consider before you take out a PCP deal:
1. Mileage limits and charges
Many people choose to hand the car back to the dealer at the end of their finance agreement. Due to this, you will need to set an agreed annual mileage at the beginning of your agreement so the dealer can predict the future value.
If you exceed these milage limits at the end of your agreement, you may face additional mileage charges. You will also need to keep the car in good condition throughout the agreement and damage charges can also occur if you don’t.
2. Large balloon payment
Whilst low monthly payments are a big benefit for many, the large balloon payment can put many drivers off. If you want to own the car, it can be hard to afford to pay the balloon payment, which is why many people choose to hand the car back. If you want to keep the car, you could also choose to refinance the balloon payment to help make it more affordable.
3. Higher interest for bad credit
Most car loan providers will require you to pass a credit check before you are approved. PCP deals may have higher interest rates for those with a lower credit score. If you have a low credit score it can be harder to get approved also may increase your interest rate offered.
Bad credit applicants may be more suited to a hire purchase deal where the loan is secured against the vehicle and the lender can use it as collateral if you fail to repay.