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Is PCP The Cheapest Way to Finance a Car?

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When it comes to getting a car on finance, there are many options to choose from. In the UK, some of the most common car finance deals include a personal loan option and a hire purchase car finance deal. However, one of the most popular ways to finance a car is through personal contract purchase. There are many benefits to getting a car on PCP such as low monthly payments, flexible repayment terms and the ability to get a better car than you would with cash. So, with this in mind, can PCP be the cheapest way to finance a car and is it right for you? 

How does PCP work?

Personal contract purchase can be a little more complex than other forms of finance but it’s pretty easy to understand once you break it down. Unlike agreements such as hire purchase, you don’t take out a loan from a finance lender that equals the value of your chosen car. You instead cover the cost of the deprecation or the value that the car loses whilst you use it. This helps to reduce the loan amount and make monthly payments lower. PCP car deals are one of the most flexible because you have a number of options to choose at the end of your deal. 

  1. Hand the car back to the dealer and there are no more payments to be made.
  2. Use the resale value towards a new car on PCP
  3. Pay the large balloon payment at the end and keep the car. 

Most drivers choose to hand the car back at the end of the deal or use any positive equity in the deal towards another car on PCP. Paying the balloon payment and keeping the car is a great way to keep driving the car you love but the final payment can be thousands of pounds to pay which many drives are able to put forward. 

Benefits of getting a car through PCP:

There are many reasons why so many drivers choose to finance their car through PCP. 

Lower monthly payments

If you solely want to focus on the monthly amount you pay for your car, PCP can be one of the cheapest ways to finance a car. Due to its structure, the loan amount is much smaller than other options meaning you can spread the cost into more affordable monthly payments. However, if you want to keep the car, you will have to pay a large final payment. 

Flexible finance terms 

When you get a car on PCP, you can choose to spread the cost over 3-5 years. There are also multiple options at the end of your car finance deal which means you can choose which is right for you. You can decide if you want to keep the car at the end of the agreement. PCP is well suited to those who don’t want to own the car and enjoy the freedom to change their car more regularly.

Get a better car

Due to the structure of PCP, it means you can get a better car than you would with cash or hire purchase and still benefit from lower monthly payments. You can finance a brand-new car or a used car over a term that suits you. It’s a popular choose for cars with higher purchase price such as getting an electric car on PCP because you can choose a term that suits you with monthly payments that fit into your budget. Many PCP deals can also come with low interest which means you don’t pay as much in APR than you would with a higher interest rate. 

What to consider before you commit to PCP

Whilst we agree that PCP is a popular option, it won’t suit everyone and there are a few factors you should consider before you commit to signing on the dotted line. 

Mileage charges can apply

Most drivers choose to hand their car back at the end of their deal. At the start of the agreement, the dealer will need to predicate the guaranteed future value of your vehicle to calculate your loan amount. Due to this, you will need to set an annual mileage at the start and stick to it. If you exceed the annual mileage, there will be additional charges to pay at the end of your deal. 

Damage charges 

Similarly, at the start of your deal, you will agree to keep the car in good condition. You don’t own the car util the final optional payment has been made so it’s important that you look after the car you are driving. If the car goes back to the dealer in a state that goes beyond general wear and tear, you can be charged to fix the damage. 

No deposit refunds

If you choose to hand the car back to the dealer and don’t pay the balloon payment to keep the car, you won’t get any of your initial deposit back. It can be tempting to put down a higher deposit to reduce your payments but if you don’t plan on owning the car at the end, it’s not the most cost-effective way to get a car. 

Can be credit dependant

Just like any form of car finance, credit score is really important. When it comes to having a low credit score, it can be easier to get approved for PCP with bad credit as the loan amount is smaller so if you’ve missed payments in the past, it’s less of a risk for a lender to give you finance. However, it is ultimately down to the lender’s decision at the end of the day. If you’re struggling to get approved for finance, you could consider increasing your credit score first to help get easier acceptance rates and even a lower interest rate offered.

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