What is Personal Contract Purchase?
As one of the most popular ways to finance your car, Personal Contract Purchase - or PCP - is a flexible choice when looking to spread the cost of a new vehicle.
This flexibility makes PCP car finance a great choice for those wanting options at the end of the agreement.
Not only that - thanks to an optional final payment where much of the car’s value is held, monthly payments are comparably cheaper when compared to the likes of Hire Purchase (HP).
PCP car finance also has a bit more to it than HP, so let’s get into the details.
PCP Finance Example
How does PCP car finance work?
While there are some similarities to HP initially, PCP car finance has a few quirks to think about.
Deposit
Like many finance agreements, you’ll start with a deposit - the more you can put down, the less there is to finance, and so monthly payments will be cheaper.
Term
PCP agreements typically run between 36 and 48 months, but there can be flexibility on that number.
A longer term will help bring down the cost of your monthly payments as the finance is stretched out over more time - however, you’ll incur more interest over time.
Mileage
This is where a PCP agreement starts to differ from HP, as it’s important to determine the depreciation of the vehicle while it’s in your possession - and annual mileage is a key element to this.
It’s not imperative to be as accurate as possible here, but an educated guess of the amount of miles you’ll do per year is needed - more mileage means more depreciation on the car, and so monthly payments will be higher, while a reduced planned annual mileage will help bring them down.
Monthly Payments
With all the above in place, it’s time to start the agreement and, just like many finance arrangements, here’s where the monthly payments begin, with the figure based on your deposit, term and mileage.
End of the Agreement
This is where the flexibility of PCP car finance comes in - with the likes of HP, it’s a simple case of completing the last payment to make the car yours - however, PCP works a little differently, so let’s break it down.
How does PCP work at the end of the term?
The final step of a PCP agreement opens up into a handful of options for you to choose from - which one you take will depend on a mixture of preference and availability.
But first, it’s important to understand how that optional final payment works.
The ‘GMFV’
Known by a few different ways, the optional final payment is otherwise referred to as the Guaranteed Minimum Future Value - or GMFV.
This figure is set at the start of the agreement, and is based on the depreciation the vehicle will incur during your time with it and is the very least the car will be worth when you complete your monthly payments.
Take Ownership
Here’s the first instance of the GMFV coming into effect - if you pay this figure outright after completing your monthly payments, then the car becomes yours.
However, the GMFV is typically a sizable figure that is at least into the thousands, so you will need to have the capital available to pay this off for ownership of the vehicle.
Some lenders may also let you refinance the final payment, so if you still love the car but can’t pay the GMFV outright, you could keep it and continue making payments.
Part-Exchange for a New Car
For this option to be open, you need to have equity in your car - this is where the vehicle is actually worth more than the GMFV when you get to the end of the agreement.
This might be down to you doing less miles than originally stated or perhaps market conditions are in your favour.
Either way, this equity allows you to hand the car back and use this value towards your next car as a part or full deposit.
Return the Car
This is a good option for when the car is worth less than the GMFV or you just have no equity available.
The GMFV sets the car’s minimum value at the end of your agreement - if the market value is lower than this, you can return the car and walk away, avoiding the risk of paying more than the car is actually worth.
Possible Fees
It is important to be mindful of a couple of aspects that could see additional fees incurred.
The first relates to your mileage - if you look to part exchange your car or hand it back, this will be fine if you’ve stayed within your agreed mileage, but you will be subject to charges if you’ve gone over, with excess mileage being charged by the mile (usually several pence per mile).
Wear and tear also comes into the conversation here, with charges for any excess damage being made to you in this event, so be sure to understand any wear and tear policies early on.
Getting Started with PCP Finance
Ready to get started? It only takes a couple of minutes to see what you could be approved for.
Check Your Eligibility
You can quickly check your eligibility using our soft search, so there’s no impact on your credit score. It’s an easy way to see what you could be approved for before moving forward.
If you’re happy to go ahead, our in-house finance team will take it from there - matching you with the right lenders and guiding you through your application.
Please be aware that, while an initial soft search is made to check your eligibility for finance, some lenders on the soft search panel do not offer PCP.
Browse Cars and See What Works
You can also start by browsing our range of new and used cars. Try out the PCP calculator as you go, and play around with your deposit or term to see how these changes affect your monthly payments. This can help you find something that fits.
PCP is usually available on newer cars - typically around 4 years old or less - and can depend on mileage too. So you won’t see it on every vehicle, but where it is, it’s a great way to get a feel for your options.
Pros and Cons of PCP
PCP can be a flexible way to finance a car, depending on your needs - so here are the main benefits of PCP car finance, as well as a few considerations, to help steer your decision-making:
Lower monthly payments than HP, as they don’t go towards the car’s full value
Flexible options - choose to buy, return, or part-exchange the car at the end
GMFV gives your vehicle a guaranteed minimum value at the end of the term
Chance to have positive equity if the car is worth more than the GMFV
It’s easier to change cars more often than with Hire Purchase
There’s no need to sell the car yourself at the end of the term
You’ll only own the car if you choose to make the final payment
The final payment is often significant if you decide to keep the car
Mileage limits apply, and going over may result in additional charges
You may pay more than the car’s value if you choose to buy it at the end
The car must be kept in good condition to avoid excess wear charges
You’ll need to settle the finance before transferring ownership
Is PCP Worth It?
PCP is a popular choice for drivers who want lower monthly payments and the flexibility to change their car more often.
It gives you clear options at the end of your agreement, so you can decide what works best for you, whether that’s keeping the car, upgrading, or handing it back.
If you like having that choice and keeping your options open, PCP can be a really practical way to finance your next car.
When you’re ready, you can check your eligibility or explore available cars with Stoneacre.
PCP Car Finance FAQ
