Most car purchases in the UK are backed by a car finance agreement – more than 80% of car buyers use them – and by far the most popular of the different options available is a PCP (Personal Contract Purchase) car finance agreement.
Back in the day, PCP was only available if you went out to buy a brand new car but now, PCP car finance is an option for used cars too. This article considers in detail all the advantages and disadvantages of PCP finance on used cars. We start by familiarising ourselves with some of the finer points of PCP car finance, then we’ll help you weigh up the pros and cons of using this particular type of vehicle finance on a used car.
We help you make the right decision for your dream car and find the best way to pay for it. Remember, whilst, we are not a lender – we do work with claims management companies to support individuals who have been mis-sold PCP finance when entering a financial agreement – so we’re rather clued up on PCP finance.
What Is Personal Contract Purchase (PCP)?
PCP is a type of car finance agreement that allows you to pay for a car in instalments. The initial deposit is often small or even not required at all. You can choose the finance term and when the agreement ends, and there is an optional final payment called a balloon payment. Pay the final balloon payment, and then you’ll own the vehicle outright. The alternative is to return the vehicle and start again on another car with a new PCP agreement.
How Does Personal Contract Purchase Finance Work?
PCP finance uses something called residual value or Guaranteed Minimum Future Value (GMFV) which is the predicted value of what the car will be worth at the end of the agreement.
Lenders use the difference between the GMFV and the car’s current value to work out equal monthly payments which remain the same throughout the contract period. Crucially, you’re not actually paying for the car itself but rather the amount it depreciates over the course of the agreement. The monthly payments don’t cover the full cost of the vehicle so you only repay a proportion of the credit. Consequently, PCP car finance payments can be lower than alternatives like hire purchase (HP) or a personal loan.
GMFV is one of the reasons why PCP finance is so popular as it protects the consumer from the problem of rapid depreciation in the first few months of a new car’s life. Even if you cancel PCP finance early, you still won’t have to worry about depreciation.
Sometimes, there can be penalties at the end of the agreement if you go over the expected annual mileage put in place at the start of the car finance agreement. A penalty for excess mileage will be added to the balloon payment.
It’s easy to see why PCP car finance is a great option on a new car but is it quite such an attractive choice on a used vehicle? Let’s weigh up the pros and cons.
The Advantages of PCP Car Finance On A Used Car
Affordable Monthly Payments
This is one of the big winners of PCP finance compared to other types of car finance agreements for all vehicles – both new and old – because your monthly payments only cover the vehicle depreciation throughout the term of the agreement. A used vehicle which has already taken a big hit on depreciation will reduce your monthly payments even more compared to PCP on a new car. Choose wisely with a low mileage vehicle that’s around 12-18 months old and you can get all the benefits of a car that is virtually new (like warranty cover) alongside really low monthly repayments.
Zero Deposit
With PCP contracts, you can often get zero deposit options even on used cars so you won’t have to worry about making a large down payment first; even if it’s required, the initial deposit can often be very small. Of course, if you can put down a larger deposit, this will only make your monthly repayments even lower.
You Don’t Own The Car
You will only own the car outright if you pay the balloon payment at the end of the agreement but you don’t have to do this with PCP car finance. You can just give the car back or trade it for your next car on a different PCP agreement. This is a useful safety net if you are buying a used car or an older vehicle.
Manufacturer’s Discounts
If you’re buying a nearly new car from a dealership then you may be entitled to attractive discounts and special offers on your PCP deal. This includes things like a dealer deposit, discounted service package, or a competitive interest rate that is better than the equivalent on a personal loan.
Flexible Contract Terms
PCP car finance allows a lot of leeway, not just over the vehicle you choose but also how much your initial deposit will be, how long you want the PCP agreement to last, and your annual mileage. At the end of the agreed term, you also get to choose whether to make that final balloon payment and buy the car or whether to give the car back and start again with another PCP deal on a different vehicle.
Refinancing The Balloon Payment
If you do want to buy the car at the end of the agreement but don’t have the cash for the final payment, you can opt to refinance that sum, usually by renegotiating the monthly repayments until you own the car outright. You can also switch to a personal loan or other form of finance plan to cover this amount. That way you can keep your car without having to find a capital sum.
Depreciation Isn’t A Problem Even If You Cancel
Even if you decide to give the car back at the end of the finance term, you won’t be stung for depreciation – there are absolutely no strings attached, just give the car back and walk away with a used vehicle. This isn’t a representative example of PCP deals typically, however, as they’re more common for new vehicles and depreciation is more extreme here, but this will be reflected in higher monthly payments on the deal.
Bad Credit Score
Even if you have a poor credit score, you can still find that the door isn’t closed on car finance via a PCP agreement, making PCP contracts a more viable choice for people with a bad credit history than some other finance options.
The Disadvantages of PCP Car Finance On A Used Car
The Balloon Payment Can Be Expensive
The monthly payments on a PCP deal don’t reflect the true value of the car but this can catch up with you when it comes to the end of the agreement and the balloon payment. On the upside, you’ll know the amount of the final payment from the outset so you can either save up for it or prepare to cover it by refinancing this amount in order to keep the car at the end of the term if you so choose to.
More Than Fair Wear And Tear Will Cost You
The wear and tear on the car must be commensurate with the age of the vehicle if you plan on returning the car at the end of the term. Anything over and above this will likely result in a bill or you’ll have to pay a garage to put things right before the car goes back.
A Higher Interest Rate If You Have A Low Credit Score
If your credit score is poor then you may be vulnerable to a higher interest rate on your PCP deal. It’s important to use a finance calculator to understand the impact of different interest rates on a PCP agreement for illustration purposes. The representative APR is the best way to compare deals and understand the total amount payable.
Excess Mileage Charge
As part of the terms of your contract, you will have to agree to an annual mileage. If you go over this figure, you will be charged a price per mile for every mile over the agreed limit. This charge varies between different finance companies but is usually between 4p and 10p per mile and it can become expensive if you have really underestimated your motoring requirements.
Early Cancellation Can Be Expensive
You will be tied into your PCP car finance term and won’t be able to cancel early unless you have paid 50% of the total finance contract, including fees, tax, and the final balloon payment. Because of this, it can be very expensive to end your contract early. Also, if you do finish the agreement early, you won’t be entitled to a refund if you’ve already paid more than 50% of the total finance.
You Are Not The Legal Owner Of The Car
You won’t legally own the car under a PCP car finance deal, but you would be if you financed the used car through other means such as a loan. Although you must repay the finance provider, you will be able to transfer the loan proceeds as a capital sum to buy the car outright.
Is PCP Car Finance The Right Choice For A Used Car?
Everyone’s situation and finances are different so ultimately, only you can decide whether a PCP contract is the best of the available finance options for a used car. The other routes you could consider are hire purchase, personal contract hire (PCH) or a simple bank loan for your next vehicle. However, PCP finance is undoubtedly one of the most flexible and popular options and it’s certainly worth considering if you’re in the market for a used car.