Call0800 066 2882

Spread The Cost

Calculate My Loan
Monthly Payment £0
Total Repayable £0
(7.8% APR illustration)
Apply Now
This does not constitute a quote, it is for illustration purposes only. Rates may vary depending on loan amount and individual circumstances.

Why Not PCP?

July 27, 2018

What Other Lenders Don’t Tell You About PCP

The majority of UK specialist car dealers encourage customers to sign up to PCP (Personal Contract Purchase) agreements. It is a very common method used to fund specialist cars, making them affordable on a monthly basis, but what is the true cost?

What is Personal Contract Purchase (PCP)?

A PCP is basically a loan designed to make monthly repayments as low as possible, but unlike a Personal Loan or Hire Purchase agreement, you won’t be paying off the full value of the car and you won’t own it at the end of the agreement, unless you choose to settle the balloon payment.

How Does a PCP Agreement Work?

You decide over how many months you wish to fund the car, often between 24-48 months is offered. You also need to decide how many miles you’re going put on the vehicle, this is used to calculate it’s future value.

The finance company then calculates the balloon payment, this is their prediction of the car’s value at the end of the term.

You then have to pay a cash deposit, often 20-30% of the purchase price.

Monthly repayments are calculated, which remain fixed for the term of the loan. These monthly payments include capital repayment on the loan amount (purchase price – deposit – balloon), interest charged on the loan amount PLUS interest charges on the balloon value.

There are many people, including some dealers, who do not realise interest is charged on the balloon element of the loan. This can be a huge cost to include when you’re looking at the total cost of a PCP.

PCP Example

Imagine you wish to purchase a car you’ve seen and the price on the windscreen is £90,000, the predicted future valuation (balloon payment) is £40,000 and you have an £18,000 (20%) deposit.

To borrow the car, you pay…

  • Deposit – £18,000
  • Loan – £32,000 (£50,000-£18,000)
  • Interest on £72,000 (£90,000 – £18,000)
  • Total = £50,000 plus interest on £72,000

If you wish to buy the car…

  • Deposit – £18,000
  • Loan – £32,000 (£50,000-£18,000)
  • Interest on £72,000 (£90,000 – £18,000)
  • Balloon – £40,000
  • Total = £90,000 plus interest on £72,000

What happens at the end of the finance deal?

We mentioned that you can buy the car at the end of the deal but you don’t have to – in reality you have three options:

  1. Buy the car by paying the balloon payment. Pay this then you’ll own the car outright. Do note that most finance companies charge an added fee if you buy the .
  2. Hand the car back and walk away. This means you have nothing more to pay (subject to damage, and over-mileage charges, see below for more info).
  3. Get a new car. Sometimes at the end of a PCP deal, the car will be worth slightly more than the balloon payment. And if this is the case, you have the opportunity to use that ‘equity’ as a deposit on a new PCP deal on a new car. For example, if the car’s actual value at the end of the deal in the example above was £40,000 and the balloon payment is £35,000, you’d have the difference of £5,000 that you could use as a deposit to roll into another deal.

Often people go for another PCP, but you don’t have to.

In Conclusion

All-in-all a Personal Contract Purchase makes for lower monthly instalments as you’re only repaying capital on a small portion of the total loan, BUT the overall cost of the loan can be very high. If you decide to give the car back or start a new PCP deal, all you’ve achieved is to rent the car at a very high cost.

About The Author