What is PCP Car Finance?

Personal Contract Purchase (PCP) is a type of hire-purchase arrangement. It has been used extensively within the motor finance sector, with particularly strong growth rates between 2012 and 2016.

PCP finance provides borrowers with lower monthly loan installments and, potentially, a final payment, (often called a balloon payment), made at the end of the agreement. The final payment is linked to the residual, or second-hand market value of the vehicle.

PCP car finance can be broken down into three components:
  • Deposit – This is a one off payment, usually around 10% of the price, made at the start of the agreement. The higher the deposit made, the less the amount borrowed. Some brokers provided a contribution towards the deposit to lower the amount the borrower had to put down in cash. However, these were typically only made available on the condition that the borrower actually took out their own finance deal.
  • Amount Borrowed – This amount is dependent on the forecasts of the car finance provider as to what the residual (or market value) of vehicle will be worth after a period of time (usually 2-3 years later), less the initial deposit amount. The amount borrowed will be repaid with interest over the time period. It is important to understand that the borrower is not necessarily paying off the full value of the car. The amount of interest paid (APR) is dependent on the type of car finance that has been taken out. In some cases brokers had an incentive to charge higher APRs as their commission payments increased with the interest rate.
  • Final Payment Amount (This is only payable if the borrower intends to ultimately own the vehicle at the end of the agreement) – This final payment may also be know a ‘balloon payment’ or the Guaranteed Minimum Future Value (GMFV) or XXX. The amount is an estimation of what the car dealer expects the vehicle to be worth when the finance deal comes to an end (e.g. after 2-3 years). Whether a balloon payment is made on the agreement is determined at the start of the agreement. It remains optional to the borrower if they actually want to make this payment and keep the car at the end of the period. If you do decide to buy the vehicle outright at the end of the agreement, it is likely that an additional fee will be charged by the car finance firm.
If you would like further information about PCP finance claims, please enter your name and email address below.