What is PCP car finance?

You may need to put down a deposit, which is usually around 10% of the car’s price. The larger deposit you put down, the less you’ll need to borrow and pay back.

Your monthly repayments cover the car’s expected depreciation (its loss in value) over the contract term, plus interest on the amount borrowed.

You can make a final payment, known as a balloon payment, to keep the car at the end of the deal. Alternatively, you can start a new PCP contract on a new car or hand the keys back and walk away.

If you exceed the mileage limit set out in your PCP agreement, you’ll usually be charged an excess mileage fee when you return the car.  
 
This is typically charged per mile and can add up quickly if you go significantly over your allowance.  
 
Mileage limits don’t usually matter if you decide to buy the car at the end of the agreement, but they can affect the cost if you hand it back or end the deal early.  
 
It’s worth choosing a realistic mileage limit at the start to avoid unexpected charges later.

When you return a PCP car, it’s assessed against fair wear and tear standards, often based on industry guidelines such as those from the British Vehicle Rental and Leasing Association (BVRLA).

Everyday wear is expected, but damage like large dents, deep scratches, cracked alloys or torn upholstery may be classed as excessive. If the car falls outside acceptable standards, you could be charged for repairs.

Keeping the car well maintained and fixing minor issues before returning it can help reduce these costs.

Negative equity occurs when the car is worth less than the outstanding finance on your PCP agreement. This can happen if the car depreciates faster than expected.

Negative equity doesn’t usually matter if you keep making payments and return the car at the end of the agreement, as the lender bears the depreciation risk.

However, it can be an issue if you want to settle early or trade the car in, as you may need to cover the shortfall.

GAP insurance is designed to cover the difference between your car’s market value and the amount owed on your PCP agreement if the car is written off or stolen.

Because cars can depreciate quickly, a standard insurance payout may not be enough to clear the outstanding finance. GAP insurance isn’t compulsory, but it can offer peace of mind – particularly in the early years of a PCP deal when depreciation is highest.

Always compare policies and check whether it’s suitable for your circumstances.

You are entering into a credit agreement when you take out PCP, so it will be recorded on your credit report. This should only have a negative effect on your credit score if you fail to keep up with repayments.

If you stay on track with monthly repayments it could even help boost your score by proving that you are in control of your finances and can handle borrowing.

PCP finance can be used to fund both used or new cars. In some cases there might be mileage limitations – for example, some PCP dealers will ask that the car you’re financing hasn’t done over a certain number of miles.

Looking to finance a used car? Our guide to used car finance can give you more information.

Yes. Paying off a PCP deal early means settling the outstanding balance in one go so you can take full ownership of the car. This usually involves paying the remaining finance plus the optional final (balloon) payment and any interest due. You won’t need to return the vehicle, but you should ask your lender for an early settlement figure, as fees may apply.

Ending a PCP early is different. If you choose to voluntarily terminate the agreement, you must have paid at least 50% of the total amount payable. In this case, you return the car rather than keep it, and you may be charged for excess mileage or damage beyond fair wear and tear.

With Hire Purchase (HP) you usually pay an upfront deposit and then make fixed monthly payments for an agreed period. As with PCP, the finance company has security in the form of the car, so if you don't keep up with repayments, they can take it away.

HP differs from PCP because HP covers more than the depreciation of the car. In effect, you are paying it off in small chunks, meaning that ownership is guaranteed after the final payment.

You decide the contract length and annual mileage limit before paying an upfront fee to lease the car and fixed monthly payments until your contract ends. After the final payment, you return the car to the dealer or take out another lease.

Also known as bank loans, personal loans can be used to purchase a new or used car. They offer additional flexibility because the money goes directly into your bank account leaving you free to buy whatever car you wish, including vehicles for sale with private sellers. Car loans can offer very low interest rates, but typically those rates are only available to applicants with excellent credit scores. Find out more about your credit score and how to improve it with our free credit score service.