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

How Does PCP Work?

PCP finance offers a flexible path to car ownership. PCP is popular in that it offers different options depending on what you want to do when all repayments are made. PCP usually lasts 2-4 years and starts with a manageable deposit. This deposit figure is up to you, but placing down a larger sum can help reduce your payments in the long run. It’s important to only consider this if you can comfortably afford a larger deposit without breaking the bank. You also have the option of no deposit, something Marsh Finance offers. No deposit can help you save in the short term and build towards your future balloon payment. After the initial deposit, you make regular repayments until the end of your finance term. Once you get to this point, you’ll have three options:

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.

The Positives And Negatives Of PCP Finance

There are two sides to the PCP debate, which we’ve gone into below.

Positives

✅ 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.

Negatives

❌ 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.