With PCP car finance, there are 3 different parts to paying for your new car:
Like a hire purchase agreement, you pay a deposit of around 10% of the car’s value, followed by monthly payments for a fixed period.
With PCP finance, you don’t take out a loan for the total cost of the car like you do with a hire purchase. Instead, you get a loan for the difference between its price brand new and the predicted value at the end of the loan agreement. Therefore, your monthly repayments can be lower than other types of car finance or loans.
The loan amount is agreed with the dealer at the start of the contract, along with any mileage limits you’ll need to stick to.
Newer cars will lose value more quickly than used cars, but it’s still possible to take out a PCP contract on a second-hand vehicle.
You won’t own your car while you have a PCP finance contract. At the end of the term, you’ll have the option to buy it by making a final lump sum payment called a balloon payment.
If you decide not to keep the car, you can give it back to the dealer (you don’t have to pay any more towards it) or you may consider taking out a new PCP deal on another car.
It may be possible to switch between the two types of car finance. However, you’ll need to be aware of any financial implications and check the details of your contract carefully.
There may be penalties for changing or ending your PCP car finance contract before the end of the term.
As with all forms of credit, paying a PCP car finance agreement will be considered when lenders assess your affordability for a mortgage. It can also affect how much they’re willing to offer you.
For example, lenders will consider your credit score to help decide whether to accept your mortgage application. It can show them how you manage your finances. They’ll also review your income and outgoings, including any debt commitments, to make sure you can afford the monthly repayments.
A good credit score can improve your prospects of getting a mortgage, so you must keep on top of your PCP payments (any missed or late payments can negatively affect your credit score). And avoid borrowing more than you can afford to repay.