How Personal Contract Purchase (PCP) works
With a PCP agreement, you pay an initial deposit (typically 10% or more), followed by fixed monthly payments over a term of 24, 36, or 48 months. Instead of paying off the entire value of the car, your monthly instalments only cover the vehicle's projected depreciation over the agreement term plus interest.
At the start of the contract, the finance company calculates a Guaranteed Minimum Future Value (GMFV). This is an agreed forecast of what the car will be worth at the end of the term, taking into account your agreed annual mileage.
Your three options at the end of a PCP agreement
1. Buy and keep the car: Pay the optional final payment (the GMFV balloon) plus any purchase fee to take full legal ownership of the vehicle.
2. Return the car: Hand the car back to the finance provider with nothing further to pay, provided you have remained within your agreed mileage limit and the car is in good condition.
3. Part-exchange for a new car: If the car's actual trade market value exceeds the GMFV, you have positive equity. You can use that equity as the deposit toward your next vehicle on a new finance deal.
PCP versus Hire Purchase (HP)
Under a standard Hire Purchase (HP) agreement, your monthly payments cover the entire purchase price of the vehicle spread evenly across the term. Once your final payment is made, you own the car outright with no balloon payment.
Because PCP defers a large balloon payment (often 40% to 50% of the initial car value), monthly payments are substantially lower than HP. However, because you are charged interest on the entire borrowed balance including the balloon, total interest charges over the agreement are generally higher on PCP.
Worked example: £25,000 family hatchback
Consider a £25,000 vehicle purchased on a 4-year (48-month) PCP agreement at 8.9% APR:
1. Deposit: £2,500 (10%) paid upfront, leaving £22,500 of credit.
2. GMFV balloon: Agreed at £10,500 based on 10,000 miles per year.
3. Monthly payment: £370.97 per month, compared to £555.19 per month on a comparable Hire Purchase deal over the same term.
4. Total cost if returned: £2,500 deposit plus £17,806.41 in monthly instalments equals £20,306.41 total.
5. Total cost to own: £20,306.41 plus the £10,500 GMFV balloon and a £10 option fee equals £30,816.41.
Mileage restrictions and fair wear and tear
PCP contracts enforce a strict annual mileage cap (such as 8,000 or 10,000 miles per year). If you return the car having exceeded the limit, you will be billed an excess mileage penalty (usually between 6p and 15p per mile).
Vehicle return conditions are governed by the British Vehicle Rental and Leasing Association (BVRLA) fair wear and tear guide. Minor stone chips and tyre wear within legal limits are acceptable, while panel dents or kerbed alloy wheels may incur refurbishment charges.
Inputs for the PCP finance calculator
Vehicle price
The full on-the-road cash price of the car agreed with the dealer.
Customer deposit & trade-in
The combined value of your cash deposit and any equity from your part-exchange vehicle.
Agreement length
The contract duration in months, typically 24, 36, or 48 months.
APR
The annual percentage rate charged by the lender, which determines monthly interest charges.
Guaranteed Future Value (GMFV)
The optional final balloon payment set by the lender to buy the car at term end.
Option to purchase fee
A small administration fee charged only if you elect to pay the balloon and keep the car.
CALCULATOR QUESTIONS
PCP calculator questions
What happens if my car is worth less than the GMFV at the end?
You are fully protected against negative equity if you return the car. The finance company absorbs the depreciation shortfall, provided the car meets condition guidelines and mileage limits.
Can I end a PCP agreement early?
Yes. Under Section 99 of the Consumer Credit Act 1974, you have the statutory right to voluntary termination once you have paid 50% of the total amount payable (including interest and balloon).
Is PCP cheaper than Hire Purchase?
Monthly payments are significantly lower on PCP because of the deferred balloon payment, but total interest is higher because you pay interest on the balloon across the entire term.
Do I own the car during a PCP deal?
No. The finance company remains the legal owner of the vehicle until you pay the optional final payment and the purchase fee. You are the registered keeper.
Can I sell a car that is on PCP finance?
You cannot sell the car privately without clearing the finance first. You can, however, trade it in to an authorised dealer who will settle the outstanding balance directly with your lender.
What is positive equity in PCP?
Positive equity occurs when your car's market value at the end of the term is higher than the GMFV balloon. You can use this surplus cash toward your next car's deposit.