Personal Contract Purchase (PCP) is a good idea if you want lower monthly payments, plan to change your car every 2 to 4 years and can stay within an agreed annual mileage. Drivers who fit that profile hand the car back or swap it before the final 'balloon payment' is due, so they never pay the part of PCP that makes it expensive.
PCP is usually a poor choice if you want to keep the car long term. Paying the balloon payment to own it normally makes PCP cost more in total interest than Hire Purchase (HP) on the same car.
How does PCP car finance work?
PCP car finance charges you monthly for the car's expected loss in value plus interest, rather than for its full price. You can think of it as paying for the part of the car you use up.
At the start, the lender sets a Guaranteed Future Value (GFV), its estimate of what the car will be worth when the agreement ends. You'll also see it called the Guaranteed Minimum Future Value (GMFV). The GFV sets the balloon payment, the optional final payment you can make to keep the car.
Your deposit and the GFV are taken off the car's price, and the rest is split into fixed monthly payments, usually over 24 to 48 months. The GFV also depends on the annual mileage you agree. Fewer miles mean a higher GFV, so your monthly payments come down.
When the agreement ends, PCP gives you three options:
- Pay the balloon payment and own the car.
- Hand the car back with nothing more to pay, as long as you've kept to the mileage and condition terms.
- Part-exchange the car for a new deal, putting any value above the GFV towards it.
Until you choose, the lender owns the car. You still pay for its insurance, servicing, tax and fuel yourself.
PCP pros and cons at a glance
Most of PCP's advantages and disadvantages come in matching pairs, because both sides come from deferring the balloon payment to the end of the agreement. The biggest pair is lower monthly payments now against a higher total cost if you keep the car.
| Pros of PCP | Cons of PCP |
|---|---|
| Lower monthly payments than HP | Higher total cost than HP if you keep the car |
| Choice at the end: keep, hand back or part-exchange | You don't own the car unless you pay the balloon payment |
| Protection if the car's value falls | Charges for excess mileage and damage |
| Possible equity towards your next car | Ending early can be expensive |
| Low or £0 deposit | Higher APRs with poor credit |
What are the advantages of PCP?
The main advantages of PCP are lower monthly payments, a choice of what to do at the end and protection if the car's value falls. Many deals also need only a low deposit.
Lower monthly payments
PCP monthly payments are lower than HP on the same car, because you repay the car's expected depreciation rather than its full price. That can put a newer or better-equipped car within your budget.
Say you finance a £20,000 car. If the lender sets the GFV at £8,000, that sum waits until the end. Your monthly payments only cover the remaining £12,000, plus interest (before any deposit).
A choice at the end of the agreement
PCP leaves the decision about the car open until the agreement ends, when you can keep it, hand it back or part-exchange it. That suits drivers whose needs may change during the term, such as a growing family or a new job further from home.
Protection from depreciation
PCP protects you from a fall in used car prices, because handing the car back means the lender absorbs any drop below the GFV. It works as a kind of safety net on the car's value.
If prices hold up instead, the amount the car is worth above the GFV is called positive equity. You can put it towards your next car.
Low or no deposit
PCP can start with a low deposit, and some lenders offer £0 deposit deals. Paying a deposit is still worthwhile if you can, because it cuts both your monthly payments and your total interest.
What are the disadvantages of PCP?
PCP's main disadvantage is a higher total cost if you keep the car. You also won't own the car unless you pay the balloon payment, and you can face charges for extra mileage, damage or ending early. Plus, poor credit can push your rate up.
Higher total cost if you keep the car
PCP usually costs more in total than HP if you keep the car, because the balloon payment stays outstanding for the whole agreement. You pay interest on it every month without reducing it.
We ran the numbers on a £20,000 car financed over four years. Once the balloon payment was paid, PCP cost £1,389.62 more in total than HP.
You don't own the car unless you pay the balloon payment
With PCP, the lender owns the car until you pay the balloon payment, so you can't make changes that affect its value without permission. The balloon payment is often several thousand pounds. But it's fixed at the start, so you know exactly how much you'd need to save or refinance.
The lender's ownership also means it can take the car back if you stop making the payments. That's why it's worth checking the monthly cost fits your budget before you sign.
Mileage and condition charges
Handing a PCP car back means the lender checks its mileage and condition, and charges you for anything outside the agreed terms. Each mile over your allowance costs a set amount, shown in your agreement as the excess mileage charge.
Damage beyond fair wear and tear (the normal marks of everyday use) is charged on top. Dents and kerbed alloys are typical examples.
Ending early can be expensive
Ending a PCP early can be expensive, because in the first years you often owe more than the car is worth. That gap is called negative equity.
The Consumer Credit Act 1974 limits the cost through voluntary termination. It lets you hand the car back once you've paid half the total amount payable, which is everything you'd pay over the agreement, including interest and the balloon payment. If you haven't reached half, you can pay the difference and then hand the car back.
Higher costs if your credit is poor
Poor credit usually means a higher APR on PCP, because the lender takes a risk on the car's future value as well as on your repayments. APR is the yearly cost of borrowing shown as a percentage, so a higher APR means more interest.
A higher APR can wipe out the monthly saving that made PCP attractive.
PCP vs HP: a worked example
PCP costs £137.72 a month less than HP in our worked example. But it costs £1,389.62 more in total if you pay the balloon payment to keep the car.
We based both deals on the same car price, deposit, term and APR, so the only difference is the balloon payment.
| PCP | HP | |
|---|---|---|
| Car price | £20,000 | £20,000 |
| Deposit | £2,000 | £2,000 |
| Amount financed | £18,000 | £18,000 |
| Term | 48 months | 48 months |
| APR (representative) | 9.9% | 9.9% |
| Monthly payment | £314.30 | £452.02 |
| Final balloon payment (GFV) | £8,000 | None |
| Total paid if you hand the car back | £17,086.64 | Not applicable |
| Total paid to own the car | £25,086.64 | £23,697.02 |
| Total interest to own the car | £5,086.64 | £3,697.02 |
Illustrative figures only, excluding fees. Your monthly payment, GFV and APR depend on the car, the lender and your circumstances.
The two totals give a simple rule of thumb. If you'll hand the car back or change it at the end, PCP gives you four years of driving for £17,086.64 in total. If you want to own the car, HP is the cheaper route.
Read more: PCP vs. HP: What is the best option for me right now?
When is PCP a good idea?
PCP is a good idea when you value low monthly payments and flexibility more than owning the car. It suits you best if:
- you change your car every two to four years, so you never pay the balloon payment
- you drive a steady, moderate mileage and can stay within your allowance
- you want a newer car that's often still under the manufacturer's warranty
- you'd rather keep your savings than put down a large deposit
When should you avoid PCP?
You should usually avoid PCP if you plan to keep the car for five years or more. By then you'll almost certainly have paid the balloon payment, so HP or a personal loan will often cost less in total.
PCP is also a poor fit if:
- you drive a high or unpredictable mileage, which lowers the car's value and can bring excess mileage charges
- you expect your income to change, because ending early costs more in the first half of the agreement
- you'll struggle to keep the car in good condition (with young children or on-street parking, say)
- you have poor credit, since a higher APR can cancel out the monthly saving
What to check before you sign a PCP
Before you sign a PCP, check 5 figures in the agreement, because together they show what the deal really costs.
- Total amount payable: shows what the whole agreement costs, including interest and the balloon payment.
- APR: lets you compare the cost of borrowing between lenders like for like.
- Balloon payment: tells you how much you'd need to save or refinance to keep the car.
- Annual mileage allowance: should match what you really drive, because every extra mile is charged.
- Excess mileage charge: shows what each mile over your allowance would cost.
Use our PCP excess mileage calculator
Alternatives to PCP
The main alternatives to PCP are Hire Purchase (HP), Personal Contract Hire (PCH), a personal loan and paying cash. The right one depends mainly on whether you want to own the car at the end.
| Option | How it works | Own the car? | Best for |
|---|---|---|---|
| Hire Purchase (HP) | Fixed monthly payments repay the full price plus interest | Yes, after the last payment and a small option-to-purchase fee | Keeping the car long term |
| Personal Contract Hire (PCH) | You rent the car for a fixed term, paying for its depreciation | No, you always hand it back | Never wanting to own, predictable costs |
| Personal loan | Unsecured loan, usually over 1–7 years | Yes, from day one | Good credit, no mileage limits |
| Cash | Pay the full price upfront | Yes, from day one | Lowest total cost if you have savings |
Can Carplus help?
Carplus can help you compare PCP and HP deals from a panel of UK lenders, so you can see what each deal costs in total before you commit. For every quote, you'll see the monthly payment, total amount payable and balloon payment side by side.
Checking your eligibility uses a soft search, so it won't affect your credit score. Get your quote.
Final words
PCP is a good idea for drivers who want low monthly payments and plan to change cars every two to four years. If you'll keep a car beyond four years, we'd pick HP, because paying the balloon payment makes PCP the dearer route to owning it.
Whichever way you lean, compare deals on the total amount payable rather than the monthly payment. That one figure shows what each agreement really costs you.
Read more about PCP:
- PCP car finance or bank loan
- What are PCP mileage limits?
- What happens at the end of a PCP term?
- How to refinance a PCP balloon payment on a car?
- Can you trade in a PCP car to another dealer?
- PCP vs Lease: What’s Better for You?
- PCP vs. HP: What is the best option for me right now?
- What deposit will I need to pay for a PCP deal?
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