What is PCP and how does it work?
PCP, short for Personal Contract Purchase, is one of the most common ways to buy a car on finance, and one of the most misunderstood. The lower monthly payments that make PCP attractive come with a trade-off at the end of the agreement that catches a lot of people out if they have not read the small print. This guide explains what PCP actually is, how the numbers work, what the balloon payment means in practice, and how it compares to buying on hire purchase instead.
Personal Contract Purchase splits the cost of a car into two parts. During the agreement, your monthly payments cover the difference between the car's price when new and its predicted value at the end of the term, plus interest. That predicted future value is not included in your monthly payments. It is left as a final lump sum, called the balloon payment or Guaranteed Minimum Future Value (GMFV), which becomes due at the end of the agreement if you want to keep the car.
Because you are only paying off part of the car's value each month, PCP payments are usually lower than the equivalent hire purchase payments for the same car. The car itself remains owned by the finance company throughout the agreement, in the same way as hire purchase.
If the balloon payment is more than you want to pay in one go but you want to keep the car, refinancing is an option. Our guide on refinancing a PCP balloon payment covers how that works in detail.
The balloon payment, also called the Guaranteed Minimum Future Value, is set at the very start of the agreement based on what the finance company predicts the car will be worth at the end of the term, accounting for expected mileage and condition. It does not change during the agreement, regardless of what actually happens to the car's value.
This works in your favour if the car ends up being worth less than predicted: the finance company absorbs that difference, and you can simply hand the car back rather than pay the higher balloon figure. It can work against you if the car holds its value better than predicted, in which case there is positive equity in the car at the end that you could use toward a new deal, but only if you choose that option rather than handing the car back.
For more on how a car's value changes over a finance agreement, see: The car could lose value.
Whether PCP suits you depends on what you want from a finance agreement. PCP tends to work well if you like changing your car every few years, want lower monthly payments than HP for the same car, and are comfortable not knowing for certain whether you will own the car at the end.
PCP can work less well if you want certainty about owning the car outright, if you drive high mileage (since PCP agreements have mileage limits and charges for exceeding them), or if you want to keep a car for a long time after the agreement ends, since the balloon payment then becomes a significant decision point.
Mileage limits are worth taking seriously. Exceeding the agreed annual mileage results in excess mileage charges, calculated per mile over the limit, which can add up to a meaningful sum if your driving habits change during the agreement.
The core difference is what your monthly payments cover. With PCP, you pay off the difference between the car's price and its predicted future value, leaving the balloon payment at the end. With hire purchase, your monthly payments cover the full value of the car, so there is nothing left to pay beyond a small option to purchase fee, and the car is yours outright at the end with no decision to make.
This is why HP monthly payments are typically higher than PCP for the same car and term. You are paying off more of the car's value each month rather than deferring a chunk of it to the end.
For a full side-by-side comparison of HP and PCP, including which suits different situations, see our guide: HP vs PCP: what's the difference and which one should you choose?.
PCP is generally harder to access with poor credit than hire purchase. Because part of the car's value is deferred to the balloon payment, the finance company is taking on more risk around the car's future value, on top of the credit risk of the applicant. Lenders tend to reserve PCP for applicants with stronger credit profiles as a result.
Hire purchase is more widely available to applicants with poor credit, CCJs, since the full value of the car is paid off through the agreement and the finance company is not relying on a future value prediction. AutoMoney Trust offers hire purchase finance from £4,000 to £25,000 over 36 to 84 months with no deposit required, and considers applications from people with poor credit. For more, see our guide on car finance with a CCJ.
If your circumstances change during a PCP agreement, you have similar rights to an HP customer. You can request a settlement figure and pay off the agreement early, subject to an early settlement charge of up to 58 days interest under the Consumer Credit Act. You also have the right to voluntary termination once you have repaid 50% of the total amount payable, allowing you to hand the car back with nothing further owed.
For more on this right and how it applies, see: Can I end my car finance through voluntary termination?.
If the certainty of owning the car at the end appeals more than lower monthly payments with a balloon decision down the line, hire purchase might be the better fit. AutoMoney Trust offers HP finance from £4,000 to £25,000 over 36 to 84 months with no deposit required, with a soft search that will not affect your credit file. For a full explanation of how HP works, see our guide: how does hire purchase (HP) car finance work?, or check your eligibility on our apply for car finance page.
Use our car finance calculator to compare what monthly payments could look like on an HP agreement for the same loan amount and term.
With Hire Purchase, you pay the full vehicle value across fixed monthly payments, then own the car outright after a small Option to Purchase Fee. With PCP, monthly payments are typically lower because you only pay off part of the car's value, with a large optional balloon payment at the end if you want to keep it. PCP often has mileage limits and condition charges; HP does not. AutoMoney Trust offers Hire Purchase only, as it provides predictable costs and guaranteed ownership for customers buying used cars.
All cars depreciate over time, with most used vehicles losing value steadily across a finance agreement. This matters because by the end of your term, the total amount paid, including interest, may be more than the car's market value. Depreciation also affects negative equity risk: if you want to sell or settle early, the car's value may not cover the outstanding finance balance. Mileage, condition, service history, and demand all influence how quickly a car depreciates. GAP insurance can help cover the gap between a write-off payout and your outstanding finance.
Yes, under section 99 of the Consumer Credit Act 1974, you have a legal right to voluntarily terminate your hire purchase agreement once you have paid at least 50% of the total amount payable. If you have paid less, you can still apply, but you would need to cover the difference. You must return the vehicle in reasonable condition and clear any arrears. Voluntary termination may still appear on your credit file. If you are unsure whether it is right for you, speak to our team before proceeding, as other options may be available.
Your loan term directly affects both your monthly payments and the total cost of borrowing. A longer term, such as 60 or 84 months, spreads the cost over more payments, lowering the monthly amount but increasing the total interest you pay across the agreement. A shorter term, such as 24 or 36 months, means higher monthly payments but a lower overall cost. AutoMoney Trust offers terms from 24 to 84 months, so you can balance monthly affordability against total cost. Use our finance calculator to compare different term lengths before applying.
