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Car Financing: What Are The Pros And Cons Of PCP Finance?

Recent research shows that 92% of UK car owners use car financing to buy their vehicles. As of 2023, Brits owed car financing companies a staggering £39.6 billion.

In the past, the majority used a traditional hire purchase (HP) agreement. But in the past decade, Personal Contract Purchases (PCP) have gradually grown in popularity and become the norm. However, not everyone likes the idea of using a PCP deal instead of an HP agreement. In part, because they do not fully understand the pros and cons of this relatively new form of vehicle finance.

The potential benefits of PCP financing

More affordable monthly payments – in the vast majority of cases your monthly payments will be lower than they would be if you used other forms of financing. This is because you are not paying for the full value of the car, only the cost of depreciation over the term of the contract. This is a good thing, but be careful, because the balloon payment can catch you out.

Flexibility – buying a car using PCP offers you more flexibility. For example, at the end of the contract term, you do not have to purchase the car. Instead, you can simply return it, which means you have effectively been renting it long-term. Or you can trade it in for a different model and make a new PCP agreement. Not being tied to just one outcome gives you the flexibility to use the option that suits your circumstances at the time.

PCP can be used for second-hand as well as new car purchases – the fact that you can use PCP to buy an older car as well as a new car is a big plus. It means that you can get your hands on a decent vehicle even when you are working with a tight budget.

Buy without putting down a deposit – increasingly dealers are offering people the chance to drive their car away without having to pay a lump sum upfront. Of course, this greatly increases the monthly repayment and the total amount of interest paid, so in the long term, it can be expensive. But for some people, the zero-deposit option turns out to be a lifeline.

The potential disadvantages of PCP financing

The final balloon payment can be high – if you do want to own the vehicle at the end of the contract, finding the money to cover the balloon payment can be tricky. For this reason, if you think you are going to struggle to save up enough money to make the payment and definitely want to become the full owner a PCP might not be for you. However, don´t forget that in some cases you will be able to refinance the balloon payment.

Mileage allowances can be a problem – there is usually a restriction on how many miles you can travel during the contract period. If you exceed that limit, you will be charged for every extra mile. That cost can soon add up to a substantial amount.

The car needs to be kept in exceptionally good condition – because you may be handing the car back at the end of the contract the vehicle must be exceptionally well looked after. If you do not do this, you will be charged for damage that is not classed as fair wear and tear. Keeping the car to this standard can be difficult, especially if you have kids or pets.

Is PCP financing Right for you?

Ultimately, only you can decide whether buying a vehicle using Personal Contract Purchase is right for you or not. It is particularly important to fully understand the terms and conditions of any agreement you are considering. So, be sure to do some further research, read the terms and conditions, shop around, and compare deals side by side.

Never allow yourself to be rushed into a decision. Only sign on the dotted line when you are 100% sure that the PCP deal you are being offered is right for you.

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