What Is A Personal Contract Purchase (PCP)?

It’s not as common now to buy a car and keep it until you run it into the ground. According the RAC Foundation has found that the average length of car ownership is just four years (although this data is almost a decade old). And part of the reason we’re changing cars more often is the rising number of payment options such as Personal Contract Purchase’s (PCPs). It’s less common to own your car outright when you buy it.

I’ve had five different cars over the past 16 years since I passed my test. And all but one of those cars were sold on to new owners. In most cases it was so I could get a newer car. Sometimes a car starts needing more repairs so it’s not worth keeping. Sometimes he running costs may be getting high, or you just want a change.

Despite the current cost of living crisis, we’re continuing to borrow money to buy cars. There are currently 6.2 million PCP contracts in existence in the UK, with £51 billion of new lending for car finance in 2022 alone.

What is personal contract payment (PCP)?

A PCP is a type of payment plan where you pay a certain amount every month. The terms are generally for three or four years. But these payments aren’t enough to cover the full value of the vehicle. At the end of the period you can either pay off the remaining balance – known as a balloon payment – or you return the car to the dealership. When this happens you can then take out another PCP on a new vehicle. If you choose to do this you’re essentially changing your car every three to four years.

According to the FLA (Finance and Leasing Association), PCPs account for 80% of private new car and 40% of used car purchases.

The steps involved in a PCP plan

Firstly you’ll need to pay a deposit on the vehicle which is typically around 10%. Much like with a mortgage, a larger deposit will mean that you need to borrow less so your monthly payments and balloon payment will be lower.

Then you sign a credit agreement with the finance company to lend you the value of the car. Agreements will usually be in place for three to five years and include interest in your loan amount.

The finance company will charge you monthly repayments and you’ll continue paying those throughout the term. When your term ends you can either pay the remaining balance or return the car back to the dealership. It’s at this point where you may have to pay extra charges (more on that below). If you chose to return the car you have essentially long term rented the vehicle and be left with no asset.

What are the benefits?

Newer cars have fewer changes of problems because it has new parts. So there’s less chance you’ll be hit with big repair costs. And generally you don’t have to MOT a new car for the first three years.

For most a Personal Contract Purchase (PCP) is an accessible way for people to buy a new car without spending thousands outright.

What are the risks of a personal contract purchase?

If you take out a PCP plan then unless you make the balloon payment you’ll never own the car, so you won’t have any assets. During the term the car belongs to a finance company so you need to continue paying for it otherwise it may be re-possessed.

If you choose to not pay the balloon payment you may get stung with some extra charges at the end of the deal. This can include excess mileage where you’ll have to pay per extra mile that you’ve gone over the agreed mileage limit. Or you may have to pay for any damage done to the car.

Have you ever got a car financed through a Personal Contract Purchase?