How does PCP Car Finance work?

How does PCP Car Finance work?

A car is just one of those essential items that you will struggle to go about every day life without. So, what happens when your car dies but you don’t have enough money saved to buy a new car?

This is one of those times when a finance deal on a car can help you out. A PCP finance deal, a personal car purchase deal, has been a very popular option in recent times. The majority of the new cars on the road will be purchased by people using a PCP finance scheme.

How does a PCP Car Finance deal work?


We have just signed a PCP deal and I wanted to explain what it means so if you are in the same situation you go into that car dealership knowing what you are signing yourself up for.

Our car thought process

We used to have one car, a six-year-old S-Max with 80k miles on the clock. We actually bought it brand new that car was financed with around 10k of our savings and 10k that went onto an interest free credit card. This time we have structured the financing in a different way.

Since Dylan joined the Cambridge United football academy we started doing a lot of miles in the car, 20k per year in fact. Our S-max was getting tired, the breaks needed replacing, the tyres needed replacing and general wear and tear gets more expensive as the car gets older. We were just about to get a big servicing bill for maybe £1000 including all those repairs so it felt like the optimal time to sell the car.

In addition to selling our current older car, we have finally accepted that being a one car family is too much. Hubby is currently getting the train to work, costing £15 per week, hassle and extra time. Every Saturday we must rely on other parents to drive one of the boys to football games. Hubby also needs a car at work to go out and do customer visits. So, we have given in, two cars it is. A tough decision to make after 13 years of being a one car family.

We have bought two cars, a bigger family car,Toyota CHR and a smaller run-around Yaris both on PCP deals.

PCP Car Finance

This is loan agreement where you in effect rent a car for a period of time. You will pay a deposit, pay an amount every month and then at the end of the agreed loan period of time you can give the car back. You never own the car with this agreement. At the end of the agreement you can pay the balloon payment at the end of the loan agreement and keep the car or even re-finance the amount owed again over another maybe three years.

There are lots of factors involved in calculating the PCP deal, all can be tweaked to increase/decrease the monthly payment. And these are all the factors you can negotiate when buying the car. Some being things you can offer, other being things that the car sales person can offer

  • The on-the-road sales price of the new car
  • The amount of deposit you can offer for the car
  • The number of miles you do per year in the car
  • The amount of time you take the loan over
  • The interest rate you pay on the loan
  • The residual value of the car at the end of the loan contract.

These are the deals we have just structured

We have just agreed the purchase of two new 18 plate Toyotas. Why brand new? Very simple we were offered a lower monthly payment on a new car than on a one-year old car! I will share on each element what we negotiated and what money we saved.

The Toyota Hybrid CHR

The agreed price of the CHR is £26,545. This price was negotiated down from £27,115. First saving of £570.

We exchanged our S-max for £7,000 (we negotiated them up from £6,000, 2nd saving of £1,000) plus we are adding £2,000 as a deposit of our own cash.

The term of the agreement is 41 months with a mileage limit of 13,000 miles per year. This makes the residual value of the car £11,360.

This means we are re-paying a total amount of £6,185 with monthly repayments of £170 per month once you add in the 1.9% interest rate on the loan (we negotiated the APR with them reducing the initial offer of 3.9% to 1.9%, saving around £400 over the length of the agreement)

Total saving on this car of £1,970.

The Toyota Hybrid Yaris

The agreed price of the Yaris is £15,345 again this price was negotiated down from £17,895. A  saving of £2,550.

We are adding a deposit of £2,500 of our own cash.

The term is 41 months with a mileage limit of 8,000 miles per year. The residual value of this car at the end of the term is £6,435.

For this car we will be repaying £6,410 in total with repayments of £160 per month. This car was available on interest free deal (this was negotiated down from 1.9%, saving £400).

Total saving on this car of £2,950.

Negotiate Hard

You must negotiate hard on the purchase of a new car! Hopefully you can use these tips and making a saving yourself.

We had the small buying advantage that we were buying two cars but there were lots of factors to negotiate to bring the prices down. We spent five LONG hours in the car showroom negotiating this deal and we left feeling happy that we got a total of just shy of £5k knocked off our repayments. The final touch us getting the mats and a quarter tank of petrol included in each car as the final offer before we shook hands.

The agreed selling price of the cars is a big negotiable. Work the dealer hard on this. We found that we would give with one element and then they would give with another. For example I said that the deposit amount could increase by £1k and they then reduced the sale price of one car by £1,000.

The price of a car you may be exchanging is a great one to negotiate. I knew our car had a value of around £6,000 but I kept pushing them up and up on the price they would offer.

Again the interest rate on the lease agreement can be taken down to reduce any monthly payments. Work hard on this negotiation to save yourself thousands on the purchase of your car.

Advantages of a PCP car finance deal.

  • Your monthly payments are lower because you are not paying towards the residual value of your car at the end of the finance deal.
  • You can put minimum deposit down
  • You can choose the term of the finance deal that suits you, 1 year, 2 years, 3 years.
  • At the end of the finance term you have the choice to pay the balloon payment and own the car or give the car back to the garage.
  • The interest rates on PCP deals are very low at the moment.
  • The PCP car finance deal can be tweaked throughout the time, you can increase monthly payments to reduce the amount of potential balloon payment at the end of the deal.

Disadvantages of a PCP car finance deal

  • You never own the car, you are simply renting it from the car finance company. If you want to own the car you must pay the balloon payment at the end of the finance terms or set extra money aside every month to build up to this.
  • The set up of the finance deal will require a credit check and this will sit on your credit record.
  • This is debt! By signing up to a PCP deal on a car you are adding to your debt position. If you already have credit card debt think carefully about adding more debt to your money position.
  • Can you afford the extra monthly repayment for the whole term of the loan, not just now, but in two years’ time when you still have the car?

This post was a reflection of my experience of buying the car from Toyota and is not sponsored in any way.

I am taking part in the Monday Money linky with Lynn from Mrs Mummy PennyFaith from Much More With Less and Emma from EmmaDrew.Info


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Lynn Beattie

Aka Mrs MummyPenny

Personal Finance Expert

I write about personal finance made simple, lifestyle choices that will save you time and money, as well as products and services that offer great value.

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9 Responses

  1. I would add to your very sensible comments:
    1) do not understimate the mileage you may do!
    2) think about whether you are a careful driver and a good parker. If you aren’t it could cost a LOT over the term of the contract to make sure every dent and scratch is corrected.
    3) if you want to get a mortgage or a re-mortgage, the PCP payments may make it harder to meet the mortgage lender’s affordability criteria,

  2. One additional thought – did you negotiate the cost per mile if you drive more than the number of miles agreed? PCP agreements can end up with an unexpected sting in the tail, if you drive more than expected and get hit with a bill for each extra mile. Typically, PCP contracts have an excess mileage charge of 10p a mile. This means anyone driving say 5,000 more than their mileage allowance would get a bill for £500 – but if the contract has a more expensive mileage charge, the bill could be bigger.
    Also important to get any repairs and scratches fixed before the end of the deal, or you’ll be charged for them, and to make sure you follow any servicing requirements in the contract, eg may have to get the car serviced at a main dealer rather than a local garage.

    1. We did indeed look at this as had been warned. We went for 13,000 miles on the big car and 8000 miles on the small car, so 21,000 in total and we normally do 20,000 miles per year (eeek). But the penalty for going over was £50 for every 1000 miles I seem to remember asking about. And yes to scratches, we have a man who comes to the house to do that.

        1. We set 13k miles per year for the CHR, e are already at 3k after 2 months. Should have gone higher. We do so many miles for football.

  3. We’ve just bought a car and used a huge chunk of our savings. We did trade in our old one so that helped but it’s going to take a while to replace that money! It’s great to have these different options when you’re making such a big purchase.

    1. We have done this in the past…or have funded the purchase with a 0% credit card. The PCP option felt right this time as the interest rate was low and fixed. I will be putting extra money aside to hopefully pay the car off at the end of the 3 1/2 years. Then we own it. Maybe. We shall see.

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