PCP Car Finance in the UK: Weighing the Pros and Cons

A personal contract plan (PCP) is a popular way to finance the purchase of a car in the UK. It allows you to drive a newer car by deferring some payments to the end of the agreement term. 

With PCP, you make lower monthly payments than traditional car financing because you are only paying for the vehicle's depreciation during the term length (usually 2-4 years) plus interest. 

At the end of the term, you have three options:

1. Pay the balloon payment and keep the car 
2. Return the car without owing anything else (subject to fair wear and tear and excess mileage charges)
3. Trade it in and use any equity towards a new car

Pros of PCP Finance

• Lower Monthly Payments
  Since you are only paying for the vehicle's predicted depreciation and not the full car price, monthly payments are lower compared to other finance options. This improves short-term affordability.
  
  
• Drive Newer Cars
  PCP allows you to drive newer cars more frequently compared to full purchase ones. So you can enjoy the benefits of newer technologies and styling.
  
  
• Flexible Options At End Of Term 
  PCP offers more flexibility compared to regular finance agreements. You have the choice to pay the balloon payment to keep the car, return it with nothing further to pay (subject to conditions), or use any positive equity for a new car.

Cons of PCP Finance  

• Balloon Payment Risk
  Unless you have savings earmarked for the balloon payment, you risk losing the car if you can’t pay the lump sum at the end. Failure to keep up with payments during the term can also risk repossession.
  
  
• Mileage Limits
  Most PCP deals have annual mileage restrictions, typically 10,000-15,000 miles. Excess mileage charges at the end of the term can be as high as 15p per mile so this adds additional costs if you do more miles.
  
  
• Wear and Use Conditions
  As you do not own the car until all payments are made, the finance company imposes strict wear and tear rules during the term. Any damage beyond fair wear and tear gets charged when returning the car.
  
  
• Deposit May Be Lost  
  If the car gets written off and your insurance payout does not clear the outstanding finance, you risk losing your initial deposit. Also if you voluntarily terminate the agreement early you will lose your deposit and any monthly payments made.

Is PCP Right For Me?    

PCP can be suitable if:

• You want lower monthly payments to drive a newer car frequently
• You have a stable and predictable income to afford the monthly payments 
• You are confident you will not exceed the annual mileage limits
• You take good care of cars and stay within wear and tear rules  
• You have savings earmarked for the final balloon payment  

PCP may be less suitable if:

• You have unreliable or fluctuating income
• You drive significantly higher annual mileages  
• You intend to keep cars longer term 
• You dislike having strict usage conditions and restrictions
• You do not have savings set aside for the final payment  

The pros of lower monthly costs and flexible options need to be weighed carefully against the obligations around payments, maintenance and mileage. Carefully reading your PCP agreement and understanding these commitments is essential before signing up.