A Personal Contract Purchase (PCP) is a type of car finance that allows you to lease a car for a fixed period, usually between 2 to 5 years, with the option to buy the vehicle at the end of the agreement. I

t's a flexible way to finance a car with lower monthly payments compared to traditional hire purchase (HP) agreements.

You start by paying a deposit, typically between 10% and 30% of the car’s value.

You then make lower monthly payments for the duration of the contract. These payments cover the depreciation of the car, not its entire value, making them generally lower than other financing options.

The lender will set a Guaranteed Future Value for the car, which is the predicted value of the car at the end of the agreement. This amount is also known as the balloon payment.

At the end of the term, you have three options:

• Hand back the car with no further payments, provided you've adhered to the mileage limits and the car is in good condition.
  
  

• Pay the balloon payment (GFV) to own the car outright.
  
  

• Trade the car in and start a new PCP agreement. If the car is worth more than the GFV, you can use the difference as a deposit towards the next car.

Your agreement will include a mileage limit. Exceeding this limit can result in excess mileage charges.

Upon return, the car must be in good condition. Charges may apply for any damage beyond normal wear and tear.

Be aware of the interest rates applied to your payments, as they affect the total cost of financing.

PCP deals are based on the car's predicted depreciation. A car that holds its value well is generally more cost-effective in a PCP deal.

Applying for a PCP loan requires careful consideration and planning, but by following these steps, you can ensure that you choose the best possible deal for your financial situation and vehicle needs.

Check Your Credit Score

Your credit score significantly impacts your ability to get a PCP deal and the interest rates you'll be offered. A higher score usually results in better terms.

Check your credit score with, Experian, Equifax, or TransUnion.

Check your Affordability

Determine how much you can afford to pay monthly and upfront as a deposit. Remember, a larger deposit typically reduces your monthly payments.

Research Vehicles: Decide on the type of vehicle that suits your needs and budget. Consider the car’s residual value, as it affects the Guaranteed Future Value (GFV) and hence the PCP terms.

Find a Dealer or Lender

Visit dealerships that offer the vehicle model you're interested in. Dealers often have partnerships with finance companies and can offer competitive PCP deals.

Alternatively, look for financing options directly from banks or specialised automotive finance companies. Comparing offers is crucial to finding the best deal.

Get Quotes

Obtain quotes for the PCP agreement on the vehicles you are interested in. Ensure the quotes include details on monthly payments, deposit, term length, interest rate, and GFV.

Carefully review the terms, paying close attention to the mileage limit, what happens at the end of the agreement, and any fees for exceeding mileage or damage to the vehicle.

Apply for the PCP Loan

Once you select a dealer and a loan offer, you'll need to fill out an application form. This will likely require personal information, details about your finances, and employment.

Prepare to provide proof of identity (e.g., passport or driver's license), proof of address (e.g., utility bill or bank statement), and proof of income (e.g., payslips or bank statements).

Finalise the Agreement

The lender will review your application and perform a credit check. If approved, they will provide you with the finance agreement.

Read the contract thoroughly. Ensure you understand all the terms and conditions before signing.

After signing the agreement, you'll pay the deposit, and then you can take possession of the vehicle.

Plan for the End of the Term

As you approach the end of the PCP term, consider your options—return the vehicle, pay the GFV to own it, or use any equity towards a new PCP deal on a new vehicle.

Additional Tips

Look out for special offers from dealerships, especially during promotional periods, which may include lower interest rates or contributions towards your deposit.

Don't hesitate to negotiate the price of the car and the terms of the PCP agreement. The sale price and initial finance terms are not always final.

PCP agreements can be a good  flexible credit options to buy a car. Please see the list of advantages below:

• Since you're only paying off the car's depreciation during the term, monthly payments can be lower.
  
  

• You have multiple options at the end of the agreement, giving you flexibility based on your circumstances at that time.
  
  

• Access to Newer Cars: PCP makes it easier to drive a newer car more often.

PCP agreements might be more costly overall and come woth drawbacks. Please see the list of disadvantages below:

• You don’t own the car during the agreement unless you pay the final balloon payment.
  
  

• While monthly payments are lower, the total cost can be higher if you choose to purchase the car.
  
  

• You're bound by the conditions of the contract, including mileage caps and maintenance standards.