Glossary · UK
What is PCP (Personal Contract Purchase)?
A car finance agreement where monthly payments cover only the difference between the car's price and its predicted future value, leaving a large optional final payment to actually own the car.
Full Definition
Personal Contract Purchase is the most common way new and nearly-new cars are financed in the UK. Instead of the monthly payments covering the full cost of the car as with a conventional Hire Purchase agreement, a PCP agreement sets a Guaranteed Minimum Future Value (GMFV) at the outset -- the finance company's estimate of what the car will be worth at the end of the agreement, typically 2 to 4 years later, based on predicted mileage and condition. The monthly payments are calculated to cover only the difference between the car's price (less any deposit) and this GMFV, plus interest, which is why PCP monthly payments are usually noticeably lower than an equivalent Hire Purchase agreement for the same car. At the end of the agreement the driver has three options: hand the car back and walk away (provided it is within the agreed annual mileage limit and in fair condition, since excess mileage and damage charges can apply), pay the large final "balloon" payment (equal to the GMFV) to own the car outright, or use any equity in the car -- if its actual value is higher than the GMFV -- as a deposit towards a new PCP agreement, which is how most PCP customers effectively continue. Because ownership is optional and deferred, PCP is regulated as a form of consumer credit; interest is charged on the full amount financed (not just the depreciation), and missing payments can lead to the car being repossessed, since legal ownership stays with the finance company until the balloon payment is made.
How PCP (Personal Contract Purchase) is calculated
Monthly payment funds (Car price - Deposit - GMFV) over the term, plus interest- GMFV
- Guaranteed Minimum Future Value -- the pre-agreed value of the car at the end of the agreement.
- Deposit
- Upfront payment, often including any part-exchange value.
Worked example: A GBP 25,000 car with a GBP 3,000 deposit and a GBP 12,000 GMFV after 3 years finances GBP 25,000 - 3,000 - 12,000 = GBP 10,000 (plus interest) over the monthly payments, leaving a GBP 12,000 optional final "balloon" payment to own the car outright.