Personal Contract Purchase (PCP) car finance explained

The PCP (personal contract purchase) is by far the most popular way to buy a car on finance in the UK, for both new and used cars. It’s also the option most heavily promoted by car manufacturer and car dealerships.

But while the PCP is everywhere, it’s also widely misunderstood. Many buyers sign agreements worth tens of thousands of pounds without fully understanding how they work, what the risks are, or what happens at the end.

This guide explains, in plain English:

• What a PCP actually is
• Why it’s so popular
• How the payments work
• Your options at the end of the agreement
• The key advantages and disadvantages
• When a PCP might – or might not – be right for you

Why do dealers push PCP so hard?

When you visit a car dealership, the salesperson is often more interested in your monthly budget than in which car you want. That’s because PCP finance makes cars look far more affordable on a month‑to‑month basis.

Around 90% of new cars bought privately in the UK are financed using PCP, making it by far the most common way to pay for a new car. Hire purchase (HP), leasing, personal loans and other funding methods make up the remaining minority.

PCP is also increasingly used for used cars, especially ‘approved used’ vehicles sold by franchised dealers. Around half of all used cars sold by dealerships are now bought on PCP, and that proportion continues to rise.

For dealers and manufacturers, PCP has two big advantages:

• Lower monthly payments allow customers to afford more expensive cars
• Most customers can’t afford the large final payment, so they return to the dealer for another PCP, creating repeat business

What is a PCP?

A personal contract purchase (PCP) is a specific type of hire purchase (HP) agreement. On finance paperwork, it’s often still described as a hire purchase, which adds to customer confusion. It’s also often incorrectly referred to as a personal contract plan (rather than purchase).

The key difference between PCP and a traditional hire purchase is how much of the car you repay each month.

• With a hire purchase, you repay the full value of the car in equal monthly instalments
• With a PCP, you repay only part of the car’s value during the agreement, with a large amount left until the end

That large amount at the end is known as the final payment or balloon payment.

You then have several options for dealing with this final amount, depending on whether you want to keep your car, change it for another one or simply get rid of it.

How PCP monthly payments work

With a PCP, your monthly payments are lower because you are not paying off the full cost of the car. Instead, you are paying for the car’s depreciation over the agreement.

Here’s a simplified comparison (for illustration only – interest and fees excluded):

In both cases, the car only becomes yours once all payments are made, including the final £8,000 on the PCP.

Most buyers change their car every three to four years and don’t have a large lump sum available. For those buyers, PCP offers much lower monthly payments than hire purchase.

Why PCP makes cars seem more affordable

In practice, many buyers don’t use PCP to reduce their monthly payments. Instead, they use it to buy a more expensive car for the same monthly cost.

For example:

The monthly payment is the same, but the PCP allows you to borrow significantly more because a large chunk is deferred to the end.

This is one of the main reasons premium brands such as Audi, BMW and Mercedes‑Benz sell so many cars in the UK – PCP finance makes them look affordable on a monthly basis.

Why PCP car finance is so confusing

Despite its popularity, PCP is a complicated product. Research consistently shows that around 90% of buyers don’t fully understand how their PCP works or what’s in the small print.

Car dealers tend to be fairly terrible at explaining how PCPs work, largely because they just want you to buy the car and not get bogged down in financial details that may derail their sale. Also, many car salespeople are not properly trained on how PCPs work, so they don’t explain it clearly because they don’t understand it themselves.

Even car websites and national news media reports often confuse PCP with leasing or other types of finance, which doesn’t help consumers make informed decisions.

If you find PCP confusing, you are very much not alone.

The three parts of a PCP agreement

Every PCP has three main components:

1. Deposit (upfront payment)

The deposit is your upfront payment. The more you put down, the less you borrow and the lower your monthly payments.

Most PCPs limit the maximum deposit (often around 30% of the car’s price). Your deposit can be:

• Cash
• Part‑exchange value of your current car
• A combination of both

2. Monthly payments (term)

Most PCP agreements run for 36 to 48 months, with 48 months now the most common.

You make regular monthly payments by direct debit. On a 48‑month PCP, this usually means 47 smaller payments followed by one very large final payment.

Longer terms generally mean lower monthly payments, but the difference is often smaller than buyers expect.

3. Final payment (balloon)

The final payment is the most important – and most misunderstood – part of a PCP. It’s usually referred to as the balloon payment.

When the agreement is set up, the finance company predicts what your car will be worth at the end, based on:

• The car itself and its specification
• The length of the agreement
• Your agreed annual mileage

Your deposit and monthly payments cover the difference between the purchase price and this predicted future value.

If you look at the two examples we mentioned earlier, there were final payments of £8,000 and £12,500 respectively. So we’re talking about a significant lump of money that you owe the finance company or need to otherwise avoid paying.

This final amount must be settled at the end of the agreement. Many finance companies describe this final amount as an Optional Final Payment, but that’s misleading as it’s part of your finance contract and the amount must be settled. You have several options as to how to deal with this final amount, depending on whether you want to keep your car or change it, but all of them ultimately involve the finance company getting its money back.

What is is the Guaranteed Future Value (GFV)?

The finance company guarantees that, subject to certain conditions, the value of your car at the end of the agreement will be at least the same as the final balloon payment – hence, a Guaranteed Future Value.

If you don’t want to pay out the final balloon amount (or can’t afford to), you can simply give the car back to the finance company instead and the finance is settled.

So again referring to our initial example, instead of paying the final payment of £8,000, you hand back a car that should now be worth £8,000.

If the finance company has got its numbers right to begin with, the car should be worth the same or a bit more than what is owed at the end of the agreement – so everyone walks away happy.

If the market value of the car turns out to be less than the amount outstanding (so the car’s only worth £7,000 but you still owe £8,000), that’s not your problem – the finance company takes the loss.

What are my options at the end of the PCP contract?

So you are coming to the end of your PCP agreement and the finance company has written to you to remind you that you will have to settle the outstanding balance fairly soon. What are your choices?

We have an article that explains these in a lot more detail and is definitely worth a read, but this is the summary:

1) Give the car back.
The finance company has guaranteed that the value of the car will be equal to the balance outstanding, so (subject to a few conditions) you can simply give it back and walk away. Effectively, you have treated your PCP like a lease.

2) Pay the outstanding balance, either in cash or by refinancing.
You keep your current car, and either pay off the balance from your savings or take out another loan to pay it off.

3) Part-exchange your car with a dealer. 
This is the most common way to settle your PCP, and the one dealers and car manufacturers prefer – but you don’t have to go back to the same dealer or even stick with the same brand of car.

For a far more comprehensive explanation of how these three options work and what you need to keep in mind, check out our dedicated article about your options at the end of a PCP.

You cannot sell the car privately without the finance company’s permission, as the car does not legally belong to you until the finance is settled.

PCP on new vs used cars

New cars

Most new car PCPs are offered by manufacturers’ own finance companies. Finance deals are usually part of an overall marketing strategy and often replace traditional cash discounts.

Almost all new car advertising is now done using example PCP finance quotes rather than vehicle prices. It’s important to understand that these are simply examples, and you can tailor a finance plan to suit your needs. If that means a higher or lower deposit, shorter or longer term, or adding any additional options to the vehicle, it shouldn’t change the interest rate or deposit contribution (if any) being offered.

Many new car offers are time-limited, meaning you have to have signed an order and taken delivery by a certain date. If you don’t, you may find that the interest rate suddenly goes up and/or the deposit contribution is no longer available, meaning your new car is suddenly a lot more expensive than you expected.

Used cars

PCP car finance works in exactly the same way on used cars, but interest rates are usually higher and deposit contributions are rare.

The offerings on PCP deals for used cars vary greatly as there are rarely any big discounts from car manufacturers (who would much rather sell you a new car), and dealers tend to use whichever finance company they have a partnership with, rather than working exclusively with the manufacturer’s finance company.

That means that, although a used car may have a sticker price that’s significantly cheaper than a brand new car, it might not be that much cheaper in terms of your monthly payment because there’s less discounting and you have to pay more in interest.

However, independent finance companies can often beat dealer quotes, and shopping around can potentially save thousands of pounds.

What are the disadvantages of a Personal Contract Purchase?

PCP can work well in the right circumstances, but there are important downsides.

The reason that car dealers and car manufacturers push PCP finance so hard is that it’s generally good news for them. It may or may not be suitable for you, but they don’t really care about that. They’re just desperate to make you think that it’s good for you.

So here are the things you really need to consider before signing that PCP contract:

• You get locked into an endless PCP cycle
• It’s expensive to get out early
• The terms and conditions are restrictive
• You can’t sell the car to repay your debt

You get locked into an endless PCP cycle

A PCP is not great if you want to keep your car at the end of the agreement, as you’ll have to pay a large chunk of money to settle the rest of the finance (the balloon amount).

Statistically, there’s about a 90% chance you won’t have enough cash available to pay off your balloon amount at the end of your agreement to keep your car, so you’d have to borrow more money to pay off the balloon. If you don’t have the cash and you don’t want to borrow more money to keep your current car, that means you’re pretty much having to change your car at the end of the term and take out another PCP, even if that’s not convenient at the time.

It’s really difficult to get out early

A PCP is not great if you want or need to change your car early (see below), as your monthly repayments are not enough to cover both the car’s initial rate of depreciation and the interest on the loan. As a result, you’re likely to owe a lot more than your car is worth for the majority of your PCP term.

That means you will probably have to pay a lot of money (often thousands of pounds) just to get rid of your current car, before you even start to worry about paying for your next car.

The rules are restrictive

If you want to claim the Guaranteed Future Value (GFV) and return the car at the end of your agreement, you must have complied with the mileage allowance. The car must also have been fully serviced – on time, every time – usually by a franchised dealership (not an independent garage). Finally, you must return the car in good condition, as you’ll be responsible for any damage beyond normal wear and tear.

Because the car belongs to the finance company, you can’t change the registration details (for example, transfer the car from your name into your spouse’s name) and the person borrowing the money must be the registered keeper and main driver.

The car must be kept fully comprehensively insured at all times, with the finance disclosed to the insurer, and the insurance must also be in your name as the registered keeper, so you can’t have the car registered in someone else’s name or at a different address.

None of these restrictions are necessarily a problem, but the combination of all of them does limit what you can do with your car.

You can’t sell the car to repay your debt

A PCP is a form of secured finance, meaning the money borrowed is secured against the vehicle (unlike a personal loan, which is unsecured).

If you want to sell the car yourself, rather than part-exchanging it or giving it back to the finance company, it can be tricky because it’s not actually your car to sell. Some finance companies will have specific requirements about how you go about selling the vehicle and settling your debt, while others will simply refuse to allow it at all.

Is a PCP right for me?

A PCP can make sense if:

• You plan to change your car every few years
• Your finances are stable
• You understand and accept the final payment risk

It’s usually less suitable if:

• You want to keep the car long‑term
• You may need to exit the agreement early
• You are stretching your budget to afford a more expensive car

Before signing anything, make sure you understand:

• The total amount payable
• The interest rate and fees
• The final payment

Ask questions. Take your time. It’s far better to feel awkward in the showroom than regret the decision later.

This article was first published in 2013 and is continually updated based on reader feedback and questions. Latest update: February 2026.