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.
As 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, as 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.
The main difference is that with Hire Purchase (HP) you own the vehicle at the end of the agreement, whereas Personal Contract Purchase (PCP) includes an optional final balloon payment if you want to keep the car.
With Hire Purchase, you repay the full value of the vehicle through fixed monthly payments and become the owner once all payments and any option to purchase fee have been paid.
With PCP, monthly payments are usually lower because you are paying towards only part of the vehicle's value. At the end of the agreement, you can pay the balloon payment 9also known as a final payment) to keep the vehicle, return it, or choose another available option.
One of the main differences between HP and PCP finance is how ownership and mileage work. PCP agreement often include annual mileage limits and potential charges if the vehicle exceeds the agreed mileage or is returned with damage outside normal wear and tear. Hire purchase does not usually have mileage restrictions, making it a popular option for drivers who want flexibility and the certainty of owning the vehicle at the end of the agreement.
AutoMoney Trust offers hire purchase car finance only, providing customers buying used cars a straightforward agreement, fixed monthly payments, and the reassurance that they can own their vehicle once the agreement is completed.
Yes, your car is likely to lose value during the finance agreement. Most cars depreciate over time, meaning they gradually lose value as they age. For most used cars, depreciation continues throughout a Hire Purchase agreement, so the vehicle is typically worth less at the end of the finance term than when it was purchased.
Depreciation is important because the total amount payable on a car finance agreement includes the amount borrowed, interest, and any applicable fees. As a result, the total amount you repay over the agreement may be higher than the vehicle's market value by the time your finance ends.
Depreciation can also increase the risk of negative equity. If you decide to settle your car finance early or sell the vehicle before your agreement has ended, the car's current market value may be lower than the outstanding finance balance. In this situation, you may need to pay the difference before the agreement can be settled.
The rate at which a car depreciates depends on several factors, including its age, mileage, condition, service history, brand, model, and market demand. Keeping your vehicle well maintained and within reasonable mileage can help preserve its value over time, although depreciation cannot be avoided completely.
Some drivers also choose to take out GAP insurance, which may help cover the difference between an insurer's payout if the vehicle is written off and the remaining balance on the car finance agreement. This can provide additional financial protection particularly during the earlier years of a hire purchase agreement, when the outstanding finance may be higher than the vehicle's market value.
Yes, you may be eligible for voluntary termination (VT) of car finance if you've paid at least 50% of the total amount payable under your hire purchase agreement. Under section 99 of the Consumer Credit Act 1974, customers have a legal right to voluntarily terminate your hire purchase agreement, provided the required conditions are met.
Car finance voluntary termination allows you to return the vehicle and end your hire purchase agreement without making the remaining monthly payments. If you've paid less than 50% of the total amount payable, you may still be able to request voluntary termination, but you'll need to pay the difference before the agreement can be ended.
The vehicle must also be returned in reasonable condition, and any outstanding arrears or missed payments will need to be cleared before the agreement can be concluded.
Choosing voluntary termination on a hire purchase agreement may be recorded on your credit file and could be considered by future lenders when assessing applications. Before deciding whether this is the right option for your circumstances, we recommend speaking to AutoMoney Trust. Our team can explain the process, discuss any alternatives and help you understand the potential impact on your finance agreement.
The length of your car finance agreement can have a significant impact on both your monthly payments and the total cost of borrowing. Choosing a longer finance term, such as 60 or 84 months, spreads the cost of the vehicle over a greater number of payments. This can make your monthly payments more affordable, but it may mean you pay more interest overall throughout the agreement.
A shorter car finance term, such as 36 months, usually results in higher monthly payments because the balance is repaid over a shorter period. However, paying the agreement off sooner can reduce the overall amount of interest paid, making it a potentially lower-cost option over the full term.
When choosing the right finance term, it is important to consider your budget, monthly affordability, and how long you plan to keep the vehicle. The best option is one that allows you to comfortably manage your payments without putting unnecessary pressure on your finances.
AutoMoney Trust offers car finance terms from 36 to 84 months, giving you flexibility to choose an agreement that suits your circumstances. Use our car finance calculator to compare different term lengths and understand how your monthly payments and overall costs could change before applying.
