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Buying a car: What is a Personal Contract Plan and is it worth it?

Tom Bailey

Tom Bailey
Mar 28, 2017

Through the ages (of car finance) men and women have always asked themselves: to PCP or not to PCP?

For the uninitiated, PCP stands for Personal Contract Plan.

It’s one of the most popular ways to finance “purchasing” a car.

Those scare quotes are there because it’s not really buying the car. A PCP is like getting a car on a loan.

However, you will only be borrowing for the anticipated depreciation of the car, not the whole value.

And the car does not become yours automatically when you have paid that amount.


How does PCP work?

First, you pay down a deposit on the car.  

This is paid flat-out at the start and usually equals around 10% of the cost of the car.

So, if you wish to acquire a £20,000 car on PCP, first you will pay £2,000 as a deposit.

The next part is the loan part. This will equal what is predicted to be the value lost by the car over the time of the deal.

For the ease of maths, let’s assume that over three years (the time of the average PCP) this car, worth £20,000, will depreciate by £10,000.

This means that over those three years you will pay £10,000 through monthly payments.

Of course, there is also interest payment attached to that amount - usually between 4% and 7%.


Road silhouette


What happens at the end of the PCP?

At the end of the plan, you will have the option to purchase the car.

When you enter a PCP agreement, the car dealership will work out what it thinks will be the value of the car at the end of the plan, known as the Guaranteed Minimum Future Value or the “balloon payment.”

This is agreed upon at the start of the deal and is what you will pay if you wish to purchase the car.

You may also end up paying a fee for the purchase, usually for a few hundred pounds.

Buying the car, however, is by no means your only option.

The most popular option is to get a new car on a new PCP plan.

There’s some benefit to this. Often it is the case that your balloon payment is slightly below the true value of the car.

The difference, should you choose not to buy but start a new PCP plan, will be used for paying your next deposit.

Alternatively, you can simply walk away at the end of your plan.

You will owe no more payments, unless the car has accrued any major damage or run up an unusually large amount of mileage.


So, what’s the benefit of entering into a PCP plan?

Perhaps the biggest up benefit of PCP is that you make payments for the car on a monthly basis.

It allows you to not have to fork out a large amount of money at one time.

However, it’s also easier to keep up with payments than a conventional loan, as you are only paying for a fraction of the car’s total value.

It also allows, if you trade in at the end of your plan, to have a new car every three or four years, without selling and purchasing.


There’s got to be some downside though, surely?

Yes – there is.

First, unless you purchase at the end, you will be left with nothing to show for your monthly payments except for fond memories of driving your car.

That may or may not bother you: but it’s worth considering before entering into a PCP agreement.

There is also the obvious problem of debt. Don’t enter into a PCP agreement if you don’t think you will be able to always keep the up with the payments.

Failure to make payments for your PCP plan is a sure-fire way to ruin your credit rating.

And finally, while this won’t immediately affect consumers, some are warning that a decline in buoyancy of used car prices could be putting the whole PCP model under pressure.

This may, in the near future at least, result in much less favourable terms being offered by PCPs, it is being warned.

So keep an eye out.


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