Personal Contract Purchase (PCP Finance) Explained

Do you need PCP Finance explained simply and clearly? Then you’ve come to the right place! This PCP Finance Guide will explain everything you need to know about PCP Finance so you can decide for yourself whether this is the finance option for you.

What is PCP Car Finance

personal contract purchase agreement (PCP) is essentially a loan to assist you in purchasing a vehicle. It is one of the most popular ways to finance your vehicle given the set of benefits it brings compared to other traditional personal loans.

Unlike other personal loans, you won’t be paying off the full worth of the vehicle, so it’s ideal for those who might otherwise not be able to afford the monthly payments on their dream car. Likewise, you won’t own it at the end of the deal unless you choose to do so, meaning you have a myriad of options of what to do with your car once the agreement ends. 

You can use your vehicle for an agreed period of time, usually between 12 months and 4 years, and then decide at the end of this period what you would like to do with the asset. Whether you decide to opt for new or used, PCP is usually available.

How does PCP Finance Work

With Forza Finance, getting PCP finance on your vehicle is simple: 

  • Apply for finance using our online car finance calculator and complete our simple online finance application form to get a decision in seconds. 
  • Once your finance has been approved, your Forza Finance Advisor will liaise with the selected dealership and arrange for the funds to be transferred in time for the collection of your new asset.
  • If you haven’t already found your next car, our asset sourcing service scans our extensive network of approved dealers to find the best deal for you.

To explain how Personal Contract Purchase works, we can section the process into three fundamental parts: the deposit, the amount you borrow and the final payment.

PCP Deposit

If you opt for a PCP deal, you’ll need to put down a deposit of typically 10% of the car’s value. You can decide for more than the suggested deposit amount, but keep in mind that the larger the deposit, the less you’ll have to borrow.

The Amount You Borrow

Your car monthly payments will be based on two things: the interest rate (APR) and how the vehicle’s value is expected to depreciate. 

The depreciation is how much the finance company predicts the car will lose in value over the term of the deal. With this number, they can calculate a guaranteed minimum future value, or GMFV, of your vehicle. You’ll pay the amount of depreciation during the PCP deal, plus interest.

The APR, also known as the interest rate or Annual Percentage Rate, is the cost you pay each year to borrow money for your car, including other fees. It should give you an indication of the true cost of finance. 

Your monthly payments are calculated to cover the difference between the car’s initial price and the GMFV, minus the deposit you put down. Head over to our car finance FAQs page if you have any questions or would like further clarity on some of the terms used in finance deals.

Like other types of finance such as leasing or loans, PCP allows you to spread the payments for a car over a long period, typically two or three years, if you choose to do so.

The End of the PCP Deal

At the end of the PCP car finance agreement, you have several options for what you can do with the vehicle. You can:

  • Buy the car by paying the GMFV agreed at the start of your deal, also known as the ‘balloon’ payment.
  • Opt to refinance if the car is worth more than the GMFV, using this difference towards the deposit on another PCP deal.
  • Part-exchange the vehicle for another.
  • Sell the car privately by settling the balloon.
  • Return the vehicle with nothing more to pay (if depreciation resulted in negative equity).

Here are all your finance options for keeping your car after PCP, explained in detail. 

PCP Advantages

One of the biggest advantages of a PCP finance deal is flexibility since you don’t have to commit to buying the asset from the outset, allowing you to choose to change your car more regularly or settle your loan early. But it doesn’t end here: 

  • With PCP you will generally obtain lower, fixed monthly payments, whether you have a new or used vehicle, as well as lower interest rates.
  • A minimum future value is guaranteed, meaning there is lower risk in a Personal Contract Purchase agreement.
  • If you are opting out of your company vehicle scheme, your company vehicle allowance can fund your PCP monthly payments without having to pay a company vehicle tax.
  • PCP doesn’t just give you control over what to do at the end of the finance term: you decide the deposit you can pay and the term of your agreement, giving you more financial freedom to budget according to your needs.

There are alternative types of car finance for you to consider other than PCP. We have put together a complete guide of finance options: PCP, HP or Lease Purchase, take a look at it and if you need further advice, get in touch with our expert team. 

At Forza Finance we will help you find the finance solution that is best for you.


Header image: