PCP: Is It Worth It?

What is PCP car finance?

Personal contract purchase (PCP) car finance is one of the most sought-after car finance options.

PCP allows you to split the cost of your car into a series of affordable monthly repayments (plus interest), as well as a deposit and an optional final payment – also called a balloon payment. It offers lower monthly repayments and a lower deposit compared to other kinds of car finance agreements.

These monthly repayments are lower because a higher proportion of the loan is deferred until the optional final payment. This is a lump sum you’ll need to pay the lender to own the car outright.

This lump sum or balloon is calculated based on what’s called your car’s guaranteed future value or GFV. The GFV is calculated according to a forecast of the vehicle’s value at the end of the agreement. This forecast is based on factors like the car’s anticipated mileage – so if you breach this figure or incur excessive vehicular wear and tear, you can face hefty fines.

The length of a PCP agreement is typically anywhere from 24 to 36 months or three to five years. The longer the term of your PCP finance agreement, the lower your optional balloon payment will typically be. This is because newer models of cars will have a higher financial value by comparison.

What are the advantages and disadvantages of PCP?

+ Lower monthly repayments and deposit

Compared to other car finance agreements, PCP has a lower deposit and monthly repayments.

Plus, there’s more flexibility compared to other agreements – you have the option to pay the car off early or negotiate around the end of the repayment term.

+ Possibility of making a profit on your car

Your car’s GFV is a fixed value – it can’t change, even if the car is worth less at the end of your agreement than its GFV.

On the other hand, this can mean that your car is worth more at the end of your PCP agreement than its GFV. This puts you in positive equity, which you can leverage to your advantage. You could part exchange the car for a newer model and put this positive equity towards the deposit of your next car, for example.

Alternatively, you can pay the final balloon including a small option to purchase fee and sell the car on yourself, pocketing the difference.

+ Ideal for regularly upgrading your vehicle

The final balloon payment of a PCP agreement is optional – you don’t have to pay it. Provided that you haven’t exceeded the vehicle’s mileage limit or caused undue wear and tear, you can hand the keys back at the end of the agreement.

This is great for people who like regularly updating their car for newer, higher spec models. Plus, it means that if your vehicle has a lower GFV through no fault of your own, you don’t front the cost.

+ Balloon payment financing

If you want to make the final optional payment to own the car outright but aren’t sure you can afford it, you have options. Balloon payment financing works like any other car finance agreement – you break the cost of the balloon into affordable chunks, plus interest.

– Usage restrictions

With PCP, you defer a significant portion of the car’s value until the final balloon payment. As explained above, this lump sum is calculated based on the car’s anticipated mileage and usage.

If you breach these usage restrictions and cause excessive wear and tear on the vehicle, you’ll impact its overall GFV. The car will then be worth less at the end of your PCP agreement than estimated. You’ll subsequently face penalties for breaching usage restrictions.

PCP: is it worth it?

Whether PCP is worth it depends on what you want from your car finance. One of the main appeals of car finance is the variety of agreements. The right one for you is contingent on your needs and circumstances.

Thinking of starting your car buying journey? Try out our handy online car finance calculator to crunch the numbers on your next car.