Personal Contract Purchase, or PCP, is the most popular way to finance a new car in the UK, and one of the least understood. Its lower monthly payments make expensive cars feel affordable, but the structure is very different from a normal loan. This guide explains how PCP payments are worked out, what the balloon payment really is, what happens at the end of the agreement and the catches to watch for.
With PCP you pay a deposit and monthly payments that cover the car's expected depreciation plus interest, not the whole car. At the end you choose to hand the car back, pay a large pre-agreed balloon payment to keep it, or use any equity towards your next car. Payments are lower than HP, but you do not own the car unless you pay the balloon.
A PCP agreement is built from three numbers. First, the deposit, typically around 10% of the car's price, which reduces the amount financed. Second, the monthly payments, usually over 24 to 48 months. Third, the Guaranteed Minimum Future Value (GMFV), better known as the balloon payment, which is the finance company's prediction of the car's value at the end of the term.
The key difference from a normal loan is that your monthly payments only cover the gap between the car's price and the balloon payment, plus interest. Because you are financing the depreciation rather than the whole car, monthly payments are noticeably lower than Hire Purchase on the same car.
Take a £28,000 car with a £3,000 deposit and a GMFV of £12,000 after three years. The amount being financed against your payments is £28,000 minus £3,000 minus £12,000, which is £13,000 of expected depreciation.
Interest, however, is charged on the whole outstanding balance including the balloon, not just the £13,000. This is why PCP can cost more in total interest than an equivalent HP agreement even when the APR looks similar. Always compare the total amount payable, not just the monthly figure.
Option one is to hand the car back and walk away. As long as the car is within the agreed mileage and in good condition, there is nothing more to pay, but you have no car and no equity.
Option two is to pay the balloon payment, plus a small option-to-purchase fee, and keep the car. Most people who do this refinance the balloon with a separate loan rather than paying cash.
Option three, the most common, is to part-exchange. If the car is worth more than the balloon payment, the difference is your equity and acts as a deposit on the next car. If the car is worth less than the balloon, the guarantee means you can simply hand it back instead.
The GMFV is based on an annual mileage you agree at the start, commonly 6,000 to 12,000 miles. Exceeding it triggers an excess mileage charge, often somewhere between 5p and 15p or more per mile, which can add up to a significant bill at hand-back.
Cars must also be returned in a condition consistent with fair wear and tear, as defined in industry guidance. Scuffed alloys, dents and poor-quality repairs can all be charged for. Setting your honest expected mileage at the start, and budgeting for minor repairs before return, avoids the worst surprises.
Under the Consumer Credit Act, you have a right of voluntary termination once you have paid half of the total amount payable, which includes the balloon. Because of the balloon, the halfway point arrives later than many people expect, often well into the agreement.
Alternatively you can settle early by asking for a settlement figure and either paying it or part-exchanging the car. If the car is worth less than the settlement figure, called negative equity, you will need to cover the gap. Check the numbers before committing to an early change.
PCP suits drivers who like changing cars every few years, want lower monthly payments and are comfortable never owning the car unless they choose to. Hire Purchase spreads the full price over the term, so payments are higher but the car is yours at the end with no balloon.
A personal loan plus cash purchase can beat both on total cost if you qualify for a good rate, and gives you ownership from day one. Our PCP vs HP comparison and calculator let you put your own numbers against each option.
With a £3,000 deposit and £12,000 GMFV, payments cover £13,000 of depreciation plus interest on the full balance. At a typical rate, that is roughly £400 a month, with the £12,000 balloon still to deal with at the end.
If the same car is worth £13,500 at the end against a £12,000 balloon, there is £1,500 of equity to put towards the next deposit. If it is worth £11,000, the guarantee protects you: hand it back and the shortfall is the lender's problem.
Agreeing 8,000 miles a year but driving 11,000 means 9,000 excess miles over three years. At 10p per mile, that is a £900 charge at hand-back, which would have been cheaper to declare upfront.
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Compare PCP and HP car finance, including ownership, payments and final costs.
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Compare PCP and HP finance payments, balloon payments and total cost.
It is the Guaranteed Minimum Future Value (GMFV): a large final payment, set at the start, that you only pay if you decide to keep the car. It reflects the car's predicted value at the end of the agreement.
No. The finance company owns the car throughout the agreement. You only become the owner if you pay the balloon payment and option fee at the end.
That is what the guarantee protects against. You can hand the car back and walk away, and the shortfall is the finance company's loss, provided the car is within mileage and condition terms.
Yes, either by voluntary termination once you have paid half the total amount payable, or by settling the finance, often as part of a part-exchange. Negative equity can apply if the car is worth less than the settlement figure.
Because PCP payments only cover the car's expected depreciation plus interest, while HP payments repay the entire price. The trade-off is the balloon payment at the end of a PCP.
PCP is available on many used cars and works the same way, though GMFVs and rates differ. For older used cars, HP or a personal loan is often more cost-effective. Compare the total amount payable on each.