Used Car Finance - The PCP Explained

Posted on: 11 April 2016

When you are looking to secure finance in order to purchase a used car, you might want to consider a PCP (Personal Contract Purchase).  But what is a PCP and how does it work?  Read on to find out more.

What is a Personal Contract Purchase agreement? 

A PCP agreement allows you to repay just part of the total amount you have borrowed in order to purchase your used car.  This sum equates to the amount by which the car's value has depreciated during the term of the PCP agreement.  The amount left outstanding on the loan's balance is generally referred to as the 'balloon'. 

When you take out a PCP agreement, you will have to put down a deposit on your new car; the PCP finances the balance.  This deposit can either be in the form of cash, or you can sometimes use your existing car in part-exchange, depending on the dealer's terms.  The amount of cash deposit that's acceptable, varies between different finance companies and car dealerships, so it's well worth carrying out research on this before you fall in love with a particular car.

A PCP agreement will run for an agreed term, which may range from around 18 months up to approximately three years.  Generally speaking, the longer the term you sign up for, the lower your monthly payments will be.

The 'balloon'

The amount you repay is calculated by the finance company based on the minimum predicted value of the car at the end of the agreement.  What you pay for your car is the difference between its purchase price and the predicted value. 

The final balance ('balloon') must be paid at the end of the agreement, either by settling the amount in cash and driving the car away as yours, or by returning the car.  Another option would be to part-exchange the car for another one and taking out a new PCP.

If you want to settle the PCP earlier than the end of term date, you can, although there is often a small penalty charge for this.  You may also be permitted to pay off lump sums as and when you can afford to do so, thus reducing your monthly payments.

In conclusion

Using a PCP agreement to finance your used car purchase could be a very cost-effective way of procuring the car of your dreams, especially if you plan on replacing your car after a few years.  To find out more about how a PCP agreement could work for you, have a chat with your local financial advisor or car dealer.