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PCP is the most widely used method of automobile financing in the UK. It stands for Personal Contract Purchase or Personal Contract Plan. Typically, PCP is provided by the automobile manufacturer's own financing company.

PCP Finance in Detail

Under PCP, you will be required to pay a particular amount every month for a specific contract term of anywhere between 18 to 48 months. This arrangement is similar to a hire purchase; however in this case the amount you don't repay the complete value of the car during the contract period. Instead, you pay only for the depreciation during the contract period. Or in other words, you pay for the balance between the present price of the car and its future residual value at the end of the contract period.

This residual value is known as the GMFV or the Guaranteed Minimum Future Value. The calculation of GMFV is on the basis of the car model, the contract term, and expected yearly mileage. In the case of longer contract terms or higher yearly mileage, the GMFV is low due to higher usage.

Example of PCP Finance:

Let's take an example of a Dacia Duster with an illustrative cash price of £9,500. Under traditional hire purchase, you will have to pay an upfront deposit of say £3,150 and pay the remaining £6,350 in monthly installments. If you are repaying it over 48 months at an APR of 9.9%, your monthly repayment will be around £161. At the end of this period, you would have paid the entire amount of £6,350.

However, under PCP you don't have the pay the full amount. If the GMFV of this car is £2840, you will only be paying for the difference between £6,350 and £2840. Thus, your monthly outgo will be only £99.

Options at the end of the term

Upon the expiration of the contract term, you have three options:

  1. You can return the car subject to certain conditions, such as servicing the car on time and not exceeding the mileage limit. This settlement will be similar to a car lease.
  2. You can pay the outstanding balance and take ownership of the car.
  3. Or you can part exchange your car and buy a new one. This method is the most popular when it comes to settling PCP finances. In this case, the dealer contributes towards your current finances. Going by the above example, let's say, you want to buy a new car worth $12,000 at the end of the 48-month period. Under PCP, the dealer will pay your outstanding balance of £2840, and you only have to pay the balance amount. In certain cases, your car value may be more than the GMFV, so the remaining amount serves as a deposit for the new car.

Some other key features

You do not own this vehicle during this period, but the financing company owns it.

Unlike hire purchase, there is a cap on the deposit amount. Typically, you cannot pay more than 30% of the purchase price. So if you're buying a car for £10,000 you cannot pay a deposit of more than £3,000.

In a large number of PCP deals, the buyer is required to pay vehicle tax during the contract period. In some rare cases, you may also have to pay maintenance.

PCP is a conditional sale agreement. Customers are protected under the UK law under the Consumer Credit Act 1974 and Financial Services Regulations 2004. For disputed cases, there is a Finance & Leasing Association arbitration scheme.

PCP Loan Calculator

You can calculate your monthly PCP payment using the PCP loan calculator.

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