Personal contract purchase (PCP)

This type of car finance deal is similar to a hire purchase agreement, but you usually make lower monthly payments. Keep in mind though that the total amount of money you’ll pay back is often higher.

Instead of getting a loan for the full cost of the car, you get a loan for the difference between its price brand new and the predicted value of the car at the end of the hire agreement. This is based on a forecast of annual mileage over the term of the agreement.

At the end of the term, you can:

  • Return the car to the dealer and pay any charges that you might have incurred (for example, through excessive wear and tear or going over the milage).
  • Use the resale value towards buying a new car.
  • Pay the resale value and keep it. This is also known as a balloon payment. This is based on what the dealer thinks the car is worth now – Guaranteed Minimum Future Value (GMFV) – and can range from a few hundred to a few thousand pounds. It will be a larger payment than your monthly payment. If you haven’t got this money saved, you might have to take out another loan to pay it off.
    To end the deal early or cancel it, you must have paid half the value of the vehicle. If you haven’t, you’ll need to pay the difference before you can get out of the contract. The car will need to be in good condition too, or you might be charged for repair costs.

Pros and cons


  1. Lower monthly payments.
  2. Low deposit (usually 10%).
  3. Flexible repayment terms (from 12 to 48 months).
  4. A choice of what to do at the end of the repayment term.


  1. Exceeding the mileage will usually result in additional charges.
  2. Excessive wear and tear and damage, such as scratches, can mean you’ll pay extra fees.
  3. The total amount you pay might be more than with hire purchase.
  4. You have to pay the outstanding balance to keep the car.
  5. If you plan to take your car abroad, check your PCP contract as some companies will impose a limit on the number of days your car can be out of the country and you might need to request permission before taking it abroad.


How does a Personal Contract Purchase (PCP) work?

Here’s what will happen when you finance a car through a PCP:

1. First you’ll need to pass a creditworthiness assessment.

Before you sign up for a PCP deal, you’ll need to go through a creditworthiness assessment which is made up of two factors. First is the affordability of the PCP payments across the whole term of the contract based on your finances – think of it as finding out how difficult it is for you to keep up your repayments. The second is credit risk, which is the chances of you not paying your PCP loan back to the loan company.

You can get an idea of your affordability by looking at whether there are future costs that might affect your ability to keep up your repayments in 4 years’ time.

2. Then you’ll need to pay a deposit, usually 10% of the value of the vehicle.

3. You’ll then be able to use the car, but remember you don’t own it yet. You’ll also need to make your payments for the duration of the contract.

Make sure you stay within your mileage restriction. There will be charges if you go over your limit. Be extra careful not to damage it too as you may be charged at the end of the contract. If you think you may go over the allowed mileage it may be worth considering getting a deal with more mileage.

People save money faster if they have a definite savings target, so find out how to set a savings goal

4. When the contract is up, you’ll need to decide if you want to keep the car, return it, or use its value to act as a deposit on a new PCP.

If you want to keep the car, you’ll need to make a final payment, often called a balloon payment. This is based on what the dealer thinks the car is worth now – its Guaranteed Minimum Future Value (GMFV). This can range from a few hundred to a few thousand pounds, but will be much more than the normal monthly payments. If you haven’t got this money saved, you may have to take out another loan to pay it off.

5. If you’re not going to keep the car, you can hand it back without any further payments.

6. Alternatively, you can use the car’s value after paying off the GVF as a deposit on a new PCP.

Alternatives to Personal Contract Purchase (PCP)

The most important thing to decide, before you take out a PCP, is whether you’re likely to keep the car at the end of the PCP or not. If you’re not, leasing a car through personal contract hire (PCH) might work out cheaper for you.

Non-fuel running costs as part of a maintenance package are often included with a PCH, giving you things like annual car tax (commonly known as road tax) and routine servicing.