What Is PCP Finance And How Does It Work?

Personal contract Purchase (PCP) finance remains a top choice for drivers, offering flexible terms, lower monthly payments, and the freedom to choose from multiple options at the end of the agreement. Let’s take a look at how PCP finance works, plus the benefits and drawbacks of it.

👉 How does PCP work?
👉 The positives and negatives of PCP finance
👉 How does PCP affect your credit score?
👉 What are the different types of car finance?
👉 Conclusion

PCP Explained in Three Steps

1. Pay a deposit (optional in some cases)
2. Make fixed monthly payments covering depreciation
3. Choose what to do at the end – return, trade in, or pay the balloon

How Does PCP Work?

Summary: PCP splits your costs into a deposit, monthly payments that cover the car’s depreciation, and a final optional balloon payment at the end of the term.

PCP finance offers a flexible path to car ownership. It’s popular because you keep your monthly payments manageable, and you get real choice at the end of the agreement. Most PCP deals last between 2 and 4 years and begin with a deposit — though Marsh Finance also offers no-deposit options if you prefer to spread the cost.

A larger deposit will lower your monthly payments, but only choose this if it fits comfortably within your budget.

1. Return the car. If you aren’t looking to make your financed car your own, simply return it once repayments are made.
2. Pay a final balloon payment to own it. A balloon payment is a large lump sum that is needed to settle your existing loan. In PCP, your deposit tends to be lower than in other finance types like HP, and this difference is reflected in a final lump payment.
3. Trade it in for something else. Got your eyes on something else? No problem! You can swap out your existing car for something new, and if you have positive equity built up, you can get your hands on an upgrade!

PCP is popular in that it offers a lower upfront cost, but ultimately, a large final payment settles this out. Nevertheless, it’s a great way to save whilst you drive and work towards that final payment and financial freedom.

Your PCP Payments Explained

Summary: Your monthly PCP payments cover the car’s depreciation, keeping costs lower than traditional finance.

After your deposit, you make regular repayments for the rest of your agreed term. These monthly payments cover the value the car loses over time rather than its full price, which is why they’re usually lower than HP payments.

At the end of the agreement, there’s one final decision to make: do you want to keep the car, walk away, or upgrade to something new? That choice is entirely yours.

What Is the Balloon Payment (GMFV)?

Summary: The balloon payment is the car’s predicted future value, which you can pay at the end if you want to own the vehicle.

The balloon payment — also known as the Guaranteed Minimum Future Value (GMFV) — is a large, optional payment due at the end of your PCP contract if you want to own the car.

Think of it as the car’s predicted future value. Your monthly repayments don’t pay this amount down, which is why your monthly costs stay lower.
If you decide not to buy the car, you simply return it without paying the balloon.

Your Options at the End of a PCP Agreement

Summary: At the end of a PCP deal, you can return the car, pay the balloon to own it, or trade it in for something new.

Once you reach the end of your term, you’ll have three straightforward choices:

1. Return the car

If you’re not looking to own the vehicle long-term, hand it back once your payments are complete. As long as the car meets mileage and condition terms, you can simply walk away.

2. Pay the balloon payment and keep it

Want to keep driving your car? Pay the final lump sum and it’s yours. This settlement fee is larger than your monthly payments, so it’s worth planning ahead.

3. Trade it in for something new

If you fancy a change, you can use any positive equity in your car — meaning it’s worth more than the balloon payment — towards a deposit on your next vehicle. It’s a popular option for drivers who like upgrading every few years.

The Positives Of PCP Finance

✅ Cost-effective: PCP payments tend to be lower than HP payments. This is because you instead save for the balloon payment at the end of the agreement.

✅ Transferrable: Once your term is finished, it’s super easy to roll finance over to a new car. If the value of your car at the end of the agreement is worth more than the balloon payment, you can use the excess as a deposit for a new car.

✅ Protected: PCP protects you against vehicle depreciation. This is the rate at which your car loses value over time. At the start of a PCP finance agreement, a Guaranteed Minimum Future Value (GFMV) is set (think of this as a safety value). If the car starts depreciating at a rate where it will fall below the GFMV, you can hand the car back.

The Negatives Of PCP Finance

❌ Mileage / Wear And Tear: PCP has mileage and wear-and-tear guidelines, unlike other finance methods. If you exceed your mileage allowance or cause damage to your car, you will face a penalty, most likely financial.

❌ In For The Long Run: You are bound to your finance agreement until repayments are made. You can end early, by something known as Voluntary Termination, but this is really expensive and should be avoided.

❌ Expensive Balloon Payment: The lower monthly fees are reflected in a large final payment. If circumstances change and you can’t afford the balloon payment, your credit score and finances will take a massive hit.

How Does PCP Affect Your Credit Score?

Provided you make monthly repayments on time, PCP won’t hurt your credit score… and in most cases, will actually improve it! If you fail to make repayments, though, your credit score will take a hit. This will directly hurt your chances of being approved for finance or credit in the future. If you are coming to the end of your agreement and the balloon payment is in sight, make sure you pay! If you want to keep your car, the balloon payment must be paid. A failed balloon payment can have a huge impact on your credit score, so it’s best to set money aside every month with the final payment in mind.

What Are The Different Types Of Car Finance I Can Get?

Here at Marsh Finance, we provide hire purchase (HP) car finance, as well as PCP finance. HP and PCP are fairly similar, although there are some fundamental differences you should know about before deciding on which finance type suits you best:

• With HP car finance, you automatically own the car at the end of the agreement, whereas with PCP, ownership is optional and requires a final balloon payment.
• Both involve fixed monthly payments, but only PCP has a final balloon payment.
• Mileage charges don’t exist in HP but do in PCP.
• Both offer support if you have issues with your vehicle, and an initial deposit is only optional.

Conclusion

PCP is really popular and for a reason. Lower monthly payments and the ability to trade in for a new car are massive drivers.

Has this sealed the deal for you? Are you now all in on PCP finance? If so, visit our dedicated page and get access to even more great info, with a PCP application form at the bottom of the page, helping you take the first major step towards your new wheels.

Got a question on your mind? Visit our PCP page to see the most common customer questions, and become a PCP master.