Personal Contract Purchase (PCP): What does it mean?

Pay an initial deposit and low monthly payments for an agreed term, with an optional final payment to take full ownership.

Personal Contract Purchase (PCP): The long answer

Personal Contract Purchase (PCP) is a popular car financing option in the UK. It is a type of hire purchase agreement that allows drivers to spread the cost of a new car over a fixed period of time, typically between 2 to 4 years.

Under a PCP agreement, the driver pays an initial deposit, followed by monthly installments, which are calculated based on the car's depreciation value over the contract period. At the end of the agreement, the driver has three options:

1. Return the car: The driver can simply return the car to the dealership, with no further obligations, as long as they have adhered to the agreed mileage and condition requirements.

2. Keep the car: If the driver wishes to keep the car, they have the option to pay a pre-agreed balloon payment, which is a lump sum amount that represents the car's residual value at the end of the agreement. Once this payment is made, the car becomes the driver's property.

3. Trade-in the car: Alternatively, the driver can choose to part-exchange the car for a new one. The dealership will assess the car's value and deduct it from the balloon payment, allowing the driver to finance a new car under a new PCP agreement.

PCP offers flexibility to UK drivers, as it allows them to drive a new car without having to commit to owning it outright. It also provides the opportunity to upgrade to a new car every few years, as well as potentially benefiting from lower monthly payments compared to other finance options. However, it's important for drivers to carefully consider their mileage requirements and the balloon payment at the end of the agreement to ensure it aligns with their financial situation and preferences.