Personal Contract Purchase gives you lower monthly payments with the flexibility to hand the car back, buy it, or trade up at the end.
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Typically lower monthly payments than HP
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PCP stands for Personal Contract Purchase. It is one of the two main types of car finance, alongside HP (Hire Purchase). With PCP, your monthly payments only cover the difference between the car's value when you get it and its predicted value at the end of the agreement. This is why the monthly payments are typically lower than HP.
At the start, you and the lender agree on a contract length (usually two to four years) and an annual mileage limit. The lender sets a Guaranteed Minimum Future Value (GMFV), sometimes called the balloon payment, which is what the car is expected to be worth at the end of the term.
Your monthly payments cover the depreciation (the difference between the car's price and the GMFV) plus interest. You are not paying off the full value of the car during the agreement, which is why the payments are lower.
At the end of your PCP agreement, you have three options.
1. Hand the car back with nothing more to pay, as long as you have stayed within the agreed mileage limit and the car is in reasonable condition. This is the simplest option if you want to walk away or start a new agreement on a different car.
2. Pay the balloon payment (the GMFV) and keep the car. This is the total amount left to pay for the car to become yours. Some people fund this through savings, a personal loan, or refinancing.
3. Use any equity in the car as a deposit on your next PCP agreement. If the car is worth more than the balloon payment, the difference is yours to put towards the next vehicle. This is how many people move from one PCP to the next without needing a cash deposit.
Every PCP agreement includes an annual mileage limit, agreed at the start. Common limits are 8,000, 10,000, or 12,000 miles per year, though you can usually negotiate a different figure. Choosing a higher mileage limit increases your monthly payments because the car will depreciate more.
If you go over the agreed mileage, you will be charged an excess mileage fee for every extra mile when you hand the car back. This is typically between 5p and 15p per mile, depending on the agreement. On a car that has done 5,000 miles more than agreed at 10p per mile, that would be an extra £500.
If you know you drive a lot, it is worth either setting a realistic mileage limit at the start or considering HP car finance instead, which has no mileage restrictions at all.
If you plan to keep the car at the end, PCP usually works out more expensive than HP overall. This is because with PCP, the balloon payment at the end means you are effectively paying interest on a larger outstanding balance for longer.
If you plan to hand the car back at the end and move to a new agreement, PCP can be a cost-effective way to drive a newer car for lower monthly payments. The total cost depends on the interest rate, term length, and the car's residual value.
The monthly payments on PCP are typically lower than HP for the same car, which is one of the main reasons people choose it. But the total amount paid over the whole agreement, including the balloon if you keep the car, is usually higher than HP. For a side-by-side comparison, read our PCP vs HP guide.
PCP tends to suit people who like changing their car every few years and want lower monthly payments. If you enjoy driving a newer model and do not mind not owning the car outright, PCP gives you that flexibility.
It also suits people who drive a predictable number of miles each year and can comfortably stay within the agreed mileage limit. If your annual mileage varies a lot or you regularly do high mileage, HP may be a better fit because it has no mileage restrictions.
PCP is available on both used cars and new cars. It is also available with no deposit, though putting a deposit down will reduce your monthly payments and the total cost.
PCP is sometimes confused with leasing, but they are different products. With a car lease (also called personal contract hire), you never have the option to own the car. With PCP, you can buy it at the end by paying the balloon payment. If ownership matters to you, PCP gives you that choice where leasing does not.
If you have bad credit, PCP may still be available, though the rates offered could be higher. A soft search lets you check what you could be eligible for with no impact on your credit score.
Wondering how much car finance you can get on your salary? Use our calculator to estimate monthly payments based on the car price, your credit grade and preferred term length.
Check your eligibility for both HP and PCP deals in minutes (Representative 19.8% APR) - with no impact on your credit score. Our partner uses a soft search to give you a quote. If you proceed, a hard search will be conducted which may impact your credit score.
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Common questions about pcp car finance.
You pay a deposit (or nothing if it is a no-deposit agreement), then make fixed monthly payments for an agreed term, usually two to four years. At the end, you choose: hand the car back, pay the balloon payment to keep it, or use any equity as a deposit on your next car. Your monthly payments only cover the depreciation, not the full value, which is why they are lower than HP.
You pay the balloon payment, which is the Guaranteed Minimum Future Value set at the start of the agreement. Once paid, the car is yours. The balloon amount is fixed from the beginning so there are no surprises. You can fund it through savings, a loan, or refinancing.
It can feel that way if you hand the car back at the end, but there are key differences. With PCP, you have the option to buy the car at the end. You also build equity if the car is worth more than the balloon payment. With renting or leasing, you never have the option to own the car.
If you hand the car back having exceeded the agreed mileage, you will be charged an excess mileage fee for every extra mile. This is typically between 5p and 15p per mile depending on the agreement. You can avoid this by setting a realistic mileage limit at the start or by keeping the car at the end.
You may be able to end a PCP agreement early through voluntary termination once you have paid at least half of the total amount payable. You can also settle the agreement early by paying the remaining balance. There may be fees involved, so check the terms of your specific agreement.
If you keep the car by paying the balloon at the end, PCP usually costs more in total than HP for the same car. This is because you are paying interest on a larger outstanding balance for longer. If you hand the car back and do not pay the balloon, the total cost is just your deposit plus monthly payments, which may be less than HP. It depends on what you do at the end.
Yes. PCP is available on used cars as well as new ones. The balloon payment will be lower on a used car because its future value is lower. Used car PCP can be a good way to drive a relatively new car for affordable monthly payments.
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