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PCP finance: the key facts article
PCP finance: the key facts article

Car finance is something not only our clients often use, but the general public as well. PCP finance is just one of the many ways for someone to get a car, and one of the most popular.

But, what exactly is it? How does it work? Is it a good idea?

Well, to help you out we’ve created this guide with the key facts that you need to know about PCP finance. Keep reading to find out more!

What is PCP finance?

PCP stands for Personal Payment Contract, is a type of hire purchase designed for those who like to change their car often. It normally comes with lower payments and is a lot more flexible than other car finance agreements.

In short, PCP finance is a loan to help you buy the car you want, with the option to own it when your contract is up. You’re given the option at this time to make a balloon payment to then own the car outright or trade it in for a new one.

However, it’s important to note that this is a form of secured loan, which means if you don’t keep up with your payments then the car can be taken from you.

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How does PCP finance work?

The best way to explain how PCP finance works is to break it into three parts:

  • Your deposit
  • Borrowing amount
  • The balloon payment

Each part is different, and before you begin it’s important to do your research and make sure you know how much you can afford.

Your deposit

How much you’ll need to put down as a deposit will depend on the car you’re looking to get. Most providers will look for 10% of the car’s value, but it is possible to get an agreement with no deposit.

However, this is normally advised against as the more you put down as a deposit, the less you’ll have to borrow. If you aren’t able to save enough for this, it’s also an option to part-exchange your current car to help pay this for you.

Borrowing amount

The main to remember with PCP finance is that the amount you borrow will be based on how much value the provider thinks the car will lose over the length of your contract. This is of course minus the deposit you pay, which will give you the total amount you need to borrow.

This is then split up into your monthly payments, which you’ll usually pay over a set amount of time (normally between 24-36 months). You’ll also need to agree how many miles you will drive during your contract, which means that if you go over this you will then be charged.

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What is a balloon payment?

Your balloon payment is the amount set out in your agreement that you can pay at the end of your contract. The amount is usually how much the car is predicted to be valued at by the time you reach this stage.

This is often referred to as the Guaranteed Minimum Future Value (GMFV). You will have the choice to either pay this to own your car outright, trade it in for a new one with a new PCP agreement or simply hand the car back and owe nothing. However, if you’ve gone over your set mileage or the car is damaged, you’ll be subject to charges for this.

If you decide to get another car on PCP, you can use the difference between the cars actual value and your balloon payment as a deposit.

What can I be charged for if I hand the car back?

As mentioned above, you can be sometimes be charged if you hand your car back to the dealer, whether this is to trade it in or to simply give it back.

The main charges you can face is for going over your agreed mileage and for damage to the car. We’ve explained this in more detail below:

Mileage charges

When you set up your contract, you’ll agree a set number of miles that you’ll drive each year you have it under PCP. The reason this is done is to help dealers work out how much your balloon payment will be because mileage affects the car’s value.

If you go over the agreed mileage, you’ll be charged for each mile over the limit. This is done at a rate of so many pence per mile, which can range up to 72p.

As such it’s best to really think carefully about how much you’re going to drive before signing your PCP agreement.

Damage charges

Since you don’t own the car outright, dealers will expect it to be in reasonable condition when you hand it back. Whilst they know that it will have general wear and tear, it needs to be good enough for them to re-sell.

This means that if there are any scratches, dents or breakages on the car, you’ll be charged the cost for repairing them.

What happens if I become insolvent?

If you have a car on PCP before you enter into insolvency, then you will be expected to continue paying this as it is a secured loan. The only exception to this is if you hand the car back and you still have a debt outstanding.

For those who are already insolvent and are looking to enter into a PCP contract, you’ll need authorisation from your Insolvency Practitioner (IP) to do so. This is because it’s a large amount of credit and some debt solutions restrict your borrowing.

Maxine McCreadie

Maxine is an experienced writer, specialising in personal insolvency. With a wealth of experience in the finance industry, she has written extensively on the subject of Individual Voluntary Arrangements, Protected Trust Deed’s, and various other debt solutions.

How we reviewed this article:


Our debt experts, and insolvency practitioners continually monitor the personal finance and debt industry, and we update our articles when new information becomes available.

Current Version

November 15 2019

Written by
Maxine McCreadie

Edited by
Maxine McCreadie