PCP Car Finance

If you definitely want to own the car at the end of the contract then a hire purchase (HP) agreement may well be the cheaper option overall (though your monthly payments will be higher). However, if there is a chance you will want to hand the car back then a PCP deal will let you delay the ownership decision and in the meantime have lower monthly payments. You achieve ownership by making a final lump sum payment at the end of the contract term.

See this payments comparison.

Personal Contract Purchase (PCP) deals are a flexible way to approach car use/ownership. Whereas hire purchase (HP) commits you to eventual outright purchase and personal contract hire (PCH)/car lease commits you to long term rental without ownership PCP allows you to keep your options open.

This flexibility comes with a cost. Final ownership through a PCP deal could well turn out more expensive than if you’d gone down the HP path. And for long term rental only a PCH/lease deal could also be cheaper.

But this hasn’t stopped PCP deals becoming the most popular form of car finance in the UK.

We’ve explained above how PCP works. PCP is basically long term car rental with the option to buy at the end. Therefore the car remains the property of the finance company while you are renting it. You only own the car at the end if you choose to make the final lump sum payment. Once you own the car you can do as you please with it.

We’d argue that one is not better than the other. The one you should prefer as your car finance solution will depend on your objectives. Hire purchase (HP) is only for those people who definitely want to own the car eventually. While ownership is possible through a PCP deal it is likely to prove more expensive overall. If you are uncertain about ownership then you should not opt for HP.

Compare loan types here.

UK law permits you to cancel certain types of car finance agreement early. PCP agreements are one of these types. Doing this is called voluntary termination and is defined in section 99 of the Consumer Credit Act 1974. This law exists to protect those whose circumstances have changed and are no longer able to afford the monthly repayments.

You can end a PCP agreement early if you have repaid at least 50% of the credit given to you (including interest and fees). You must also take into account the balloon payment and ensure that the car is not damaged beyond normal wear and tear.

It is possible to extend your deal if you feel the car is still giving you what you need and have no desire to buy it outright. You should ask for a quote from your finance company and then compare it against your other options which could include taking out a new deal on a new car.

You probably opted for a PCP deal originally because it offers you flexibility at the end of the contract period. Whereas with HP you have to buy the car and contract hire (PCH) where you have to hand it back, PCP allows you to choose from three options:

1. You can keep the car – pay the optional final payment and you now own the car. This final payment could be around a third of the original value of the car
2. You can change the car – return the car and exchange it for another on a new deal. If the old car’s value is greater than the optional final payment then you have a surplus that you can use as part of the deposit on the new car (this will also help to reduce your monthly payments).
3. You can return the car – as in option 2 when you hand back the car you may have to settle costs for damage and exceeding the pre-agreed mileage. Afterwards, you’ll no longer have to make any monthly payments. If you find that the car is worth more than the optional final payment it would make financial sense to buy it and then sell it privately so as to benefit from that excess value.