What is personal contract purchase (PCP)?


If you want to buy a newer car, or a more expensive model, and you want lower monthly repayments, a PCP or lease purchase could be just right for you. Here’s how they work.

Traditionally, when you financed a car, the dealer would work out your monthly payments by taking the purchase price of the car, deducting any deposit you are paying – which could be from a part exchange, adding interest for the duration over which you are paying back the money, then simply dividing the total by the number of months the agreement will be for. You get a fixed monthly payment. Simple.

As an example. A car costing £12000 will be bought over 3 years. The deposit from your old car in part exchange is £2000. Which leaves £10000 to pay. Lets imagine the interest on the borrowing over 3 years will be £1700. So the total amount of the finance is £11,700. Divide that by 36 months and you will have a monthly payment of £325.

What’s different about PCP or a lease purchase?

The difference with a PCP or a lease purchase is, we set aside a large slice of the borrowing to be paid on the last payment of the agreement. So your monthly payments for the first 35 months are much lower.

So, the same car, the same deposit and assuming the same interest. The total cost is still £11,700. With a PCP or lease purchase we set aside a big slice of say £3700 to be paid at the end. Now we only have £8000 to be divided by 35 payments. Which is a monthly payment of £228.

The final payment

But how do you pay back the last payment of £3700 I hear you ask? Well that highlights one of the differences between a PCP and a lease purchase. At the end of the agreement with a PCP you get 4 choices.

Pay back the final £3700 and keep the car
Re-finance the £3700 over a further period
Sell the car and use any surplus for a deposit on a newer car.
Don’t pay the £3700, hand back the keys and walk away.
At the end of your agreement
With a Lease Purchase you only have 2 options

Pay back the final £3700 and keep the car
Sell the car and use any surplus as a deposit on a newer car.
The value of the car at the end of the agreement is important as it should be high enough to pay back the last payment, and ideally give you some money left over as a deposit on another car. Perrys will work out the guaranteed future value of the car for you, at the point of when you take out a PCP agreement. So with a PCP you know it will cover the final payment.

A lease purchase differs from a PCP in that the figure set for the final payment is not guaranteed by Perrys. Which means your car could be worth less than the final payment and you will have to make up the difference even if you sell or part exchange the car for a new one.

Why choose a lease purchase?
So why would you choose a lease purchase over a PCP? Well If you are buying a premium or luxury car that could hold its value better, the final payment can be set higher than a PCP, resulting in even lower repayments.

The figures here are just examples. The actual figures will vary depending on the car, the interest rate and the term of the agreement. Perrys will explain all that to you before you decide.

So in summary, with a PCP or lease purchase, the advantages are:

Lower monthly payments than Hire Purchase for the same car over the same term
A low deposit at the start
You can pay off the whole finance mid-term if you want
Fixed monthly payments throughout the term of the agreement
With a PCP there’s additional flexibility at the end of the agreement on what you want to do with the car

Working out which finance option suits you best? Pop into Perrys.