What is PCP? Personal Contract Purchase explained

7 min read

Updated: Sep 22, 2026

Written by

Joe Towner

Reviewed by

Amy Lancashire

PCP, or Personal Contract Purchase, is a way of financing a car where you pay a deposit, make monthly payments for a set term, then choose whether to buy the car, hand it back, or trade it in for a new one. The reason the monthly payments are usually lower than other types of car finance is that they cover the value the car is expected to lose while you drive it, not its full price.

It's the most common way to finance a new car in the UK, according to a sample survey of lenders carried out by the Financial Conduct Authority's review of the motor finance market. This guide explains how PCP works, what you'll pay, and what happens at the end, so you can decide whether it's the right fit.

What does PCP stand for?

PCP stands for Personal Contract Purchase. It's a type of car finance agreement offered by lenders and dealerships. You don't own the car during the agreement, the lender does, and ownership only passes to you when you make the final payment. This is different to a secured loan, where you own the asset from the start but the lender holds security over it.

How does PCP work?

A PCP agreement has three parts: a deposit, monthly payments, and an optional final payment. Here's how each one works.

The deposit

You pay a deposit upfront, often around 10% of the car's price, though you can usually pay more to bring your monthly payments down. Some deals accept a part-exchange vehicle in place of some or all of the cash deposit.

Your monthly payments

You then make fixed monthly payments over an agreed term, typically 24 to 48 months. These payments cover the expected drop in the car’s value over the term (also called depreciation), plus interest. Because you're not paying off the full value of the car, the monthly payments are usually lower than on hire purchase over the same term.

One thing worth knowing: interest is charged on the whole amount you borrow, including the value held back for the final payment. That's why the total interest on PCP may be higher than expected.

The optional final payment (balloon payment)

At the start of the agreement, the lender sets a figure called the Guaranteed Minimum Future Value (GMFV). This is what the car is predicted to be worth at the end of the term. It becomes your optional final payment, often called the ‘balloon payment’, and it's the amount you'd pay to own the car outright.

What are my options at the end of a PCP deal?

When the agreement ends, you have three choices:

Pay the balloon payment and keep the car. You make the final lump-sum payment (the GMFV) and the car is yours.
Hand the car back. You return the car and walk away with nothing more to pay, as long as you're within the agreed mileage and the car is in good condition.
Part-exchange it. If the car is worth more than the GMFV, that difference is called equity, and you can put it towards the deposit on your next car.

If you want to keep the car but don't have the balloon payment saved up, some people refinance a car loan to spread that final amount over further monthly payments instead of paying it in one go.

How much does PCP cost?

A few things impact how much a PCP deal costs:

Deposit size. A bigger deposit means lower monthly payments.
Contract length. A longer term lowers the monthly payment but usually means more interest overall.
Annual mileage limit. Higher mileage limits push up the monthly cost, because the car is worth less at the end.
The APR. This is the yearly cost of borrowing. A lower APR means you pay less overall. If you're unsure how it's calculated, see the difference between APR and the interest rate.
The car's predicted depreciation. Cars that hold their value well tend to have cheaper PCP deals, because there's less lost value to cover.

Mileage limits and wear and tear

When you take out a PCP deal, you agree to an annual mileage limit. If you go over it, you'll usually pay an excess mileage charge, worked out at pence per mile, when you hand the car back. Estimating your mileage honestly at the start matters, because the charges can add up.

The car also needs to be returned in good condition. The industry uses the BVRLA fair wear and tear standard, which separates normal wear, like light scratches, from damage you'd be charged for, like dents or torn seats. Both the mileage limit and the condition rules only matter if you hand the car back or part-exchange it. If you pay the balloon payment and keep the car, they don't apply.

Pros and cons of PCP

Like any finance, PCP will be right for some people and less so for others. Here's a clear look at both sides.

Pros

Lower monthly payments than hire purchase over the same term
Flexibility at the end to buy, return or upgrade
Lets you drive a newer or more expensive car than you might afford outright
The GMFV protects you if the car is worth less than expected at the end

Cons

You don't own the car unless you pay the balloon payment
Mileage limits and condition charges apply if you hand it back
Interest is charged on the full amount, so it can cost more overall than a shorter agreement
The large final payment can be a shock if you haven't planned for it

Is PCP right for me?

PCP tends to suit people who want lower monthly payments, like driving a newer car, and expect to change their car every few years. It suits you less if you cover high mileage, plan to keep the car for a long time, or want the cheapest possible route to owning a car outright.

There's no single right answer. It depends on your budget, how long you want the car, and how much you drive. If you'd like to weigh it against other borrowing, our guide on how personal loans compare to car finance sets out the differences.

PCP FAQs

What's the difference between PCP and HP?

With hire purchase (HP), your monthly payments cover the full price of the car, so you automatically own it once the last payment is made, with no large final payment. Monthly payments are higher than PCP, but there's no balloon payment and no mileage limit. PCP has lower monthly payments and more flexibility at the end, but you only own the car if you pay the GMFV.

What credit score do I need for PCP finance?

There's no single cut-off, as each lender sets its own criteria. A higher credit score generally means a better chance of approval and a lower APR. It's worth checking what counts as a good credit score before you apply.

Does PCP affect my credit score?

Yes. A PCP agreement is a credit product, so it appears on your credit file. Making payments on time can help your score over time, while missed payments can harm it. Applying usually involves a hard credit check, which can cause a small, temporary dip.

Can I end a PCP agreement early?

Often, yes. Under the Consumer Credit Act 1974, you have the right to voluntarily terminate the agreement once you've paid at least half of the total amount payable. If you've paid less than half, you can still end it, but you'll need to make up the difference to reach the halfway point. Paying off the full agreement early can involve an early repayment charge, so check your agreement first.

Can I get PCP on a used car?

Yes. PCP is available on used cars as well as new ones, though lenders often set an age and mileage limit on the car by the end of the agreement.

What happens if the car is worth less than the balloon payment?

This is called negative equity. It only matters if you want to part-exchange, because there's no leftover value to put towards your next car. If you hand the car back instead, you simply walk away and owe nothing further, provided you're within the mileage and condition terms. That's one of the ways PCP protects you.

Can I sell a car that's on PCP?

Not directly, because the lender owns the car until you make the final payment. To sell it, you'd first need to settle the agreement, usually by requesting a settlement figure from the lender and paying it off. Once that's cleared, the car is yours to sell.

Cookies Policy

Credit cards