Personal contract purchase (PCP) explained

Personal contract purchase, usually just called PCP, is the most common way people finance a new car in the UK. You pay a deposit, then fixed monthly payments that cover only the drop in the car's value over the term, plus interest. At the end you have three choices: hand the car back, pay a final lump sum (the balloon payment) to keep it, or trade it in for a new car on a new agreement¹.

The key to understanding PCP is that your monthly payments do not pay for the whole car. Instead, you get a loan for the difference between the car's price when new and its predicted value at the end of the agreement². Because you are only financing part of the car's value, the monthly payments are usually lower than on hire purchase, but the finance is secured against the car, and the finance company owns it until you have paid everything off³.

How PCP car finance works: you pay for the car's drop in value

The payments you make cover the drop in the value of the car while you are paying back the PCP¹. A worked example shows the principle. A car is worth £20,000. The dealership works out it will be worth £15,000 after three years. Your PCP lasts three years, so the amount you finance is the £5,000 difference, with interest on top¹. You put down a deposit and make monthly payments to cover interest and the cost of depreciation, which is the value the car loses while you are driving it³.

The finance itself normally comes from a company separate to the garage or dealership: the finance company pays the dealer for the car, and you repay the finance company in instalments, with interest added¹. Car finance of this kind is typically arranged through the dealership or a finance company⁶. Because your monthly payments only cover the car's depreciation, they are usually lower than the payments on a hire purchase agreement for the same car and term⁵.

The trade-off is what happens at the end. On hire purchase you own the car outright once the last payment is made. On PCP, the car is not yours at the end of the agreement unless you pay the optional balloon payment⁸. Until then, the finance provider still owns the car¹. This has consequences that run through the whole agreement: you cannot sell the car, the loan is secured against it, and the finance company can take it back if you miss payments¹.

The balloon payment and guaranteed future value

At the start of a PCP you agree a "guaranteed future value" with the dealer. This is based on the car type and how many miles you think you will drive¹. Experian describes it as how much the dealer thinks your car will be worth when your deal ends, and notes it is also often referred to as the Guaranteed Minimum Future Value, or GMFV⁷. Dealers work out the MGFV from the age of the car at contract end and your estimated annual mileage⁹.

This guaranteed value becomes the balloon payment: the optional final lump sum you can pay at the end of the term to buy the car². It is called a balloon because it is much larger than the monthly payments, and it can be expensive at the end⁶. Volkswagen Financial Services describes the protection this gives: PCP agreements offer a Guaranteed Minimum Future Value on your vehicle at the end of the finance term, which means you are protected against depreciation should the market value of your vehicle change more than predicted¹⁰. SEAT's finance arm makes the same point about its own PCP product¹¹.

The guarantee works in one direction only, and that is its attraction. If the car turns out to be worth less than the guaranteed value at the end, you can simply hand it back and walk away from the shortfall. If it is worth more, you can pay the balloon payment and own a car worth more than you paid for it, or trade it in and use the surplus. The guaranteed value also matters if you end the agreement early: in a PCP agreement, the Guaranteed Future Value, often referred to as the balloon payment, needs to be included in the total amount payable when working out whether you have reached the 50% mark for voluntary termination¹². The dedicated guide to guaranteed future value and the balloon payment covers this in more detail.

Deposit, monthly payments and term

Like a hire purchase agreement, you typically pay a deposit of around 10% of the car's value, followed by monthly payments for the rest of the term². Experian gives the same figure: the deposit is usually for around 10% of the car's price⁴. The deposit is generally non-refundable, and you borrow the rest³. Some providers allow a part exchange: Volkswagen Financial Services states you can even trade in your current vehicle as a deposit on its PCP product¹⁰.

Terms vary between providers. StepChange notes the agreement is normally over three years¹. Lloyds Bank spreads PCP monthly repayments over 1 to 4 years on its refinance product¹³, while Zable describes car finance terms generally as usually 2 to 5 years⁵. Bank of Scotland's PCP car plan runs to a maximum of 49 months¹⁴. The longer the term, the more interest you pay overall, and the more the car's value will have moved by the time the balloon payment falls due.

What you need to provide at the application stage is fairly standard across the market. Experian's PCP guide lists the documents you will be asked for: your driver's licence, proof of address such as a utility bill, and proof of income such as payslips or bank statements. You will also need the name and address, including postcodes, of all your employers for the last three years at least, including job title and salary. If you are self-employed, you will be asked to provide your accounts as proof of income⁴. To get approved for a PCP agreement you will usually need a good credit history, especially for 0% or low APR deals³. The guide to loan affordability checks explains what lenders must look at before lending.

PCP or hire purchase: how the costs compare

Hire purchase, or HP, works differently: you might pay an initial deposit, then repay the balance in instalments over a set period, and at the end you own the car¹². On HP the monthly payments cover the whole cost of the car plus interest, so they are higher than PCP payments for the same car and term. Bank of Scotland puts it plainly: for the same car and term, a Personal Contract Purchase plan has lower monthly repayments, and you can own the car at the end of the term with an optional lump sum payment, or return it¹⁴.

The comparison is not simply about the size of the monthly payment. Over the whole term, PCP can cost more in interest than HP for the same car, because you are paying interest for longer on a structure that defers a large chunk of the debt to the end. The balloon payment to buy the car can be expensive at the end⁶. HP suits someone whose priority is owning the car outright at the end of the payments. PCP tends to suit someone who wants lower monthly payments, plans to change the car every few years, or wants the flexibility to decide at the end whether to keep, return or swap the car. The side-by-side guide to PCP or hire purchase works through the differences in more depth.

Mileage limits and condition charges

PCP comes with yearly mileage limits which you set when you take out your agreement¹³. You agree an annual mileage limit at the start of your contract, and the lower this is, the lower your monthly payments⁴. This is because the mileage you expect to drive feeds directly into the guaranteed future value: a car expected to cover fewer miles is predicted to be worth more at the end, so you finance a smaller drop in value⁹.

Going over the agreed limit triggers excess mileage charges⁴. Which? estimates that each extra mile typically costs around 10p, so underestimating your mileage by 3,000 miles per year on a four-year contract can add up to a substantial bill at the end⁹. There are also fees for damaging the car or going over your mileage limit³. Volkswagen Financial Services states that returning a car at the end of its PCP is subject to being within BVRLA wear and tear guidelines, and that if there is any excess mileage, charges will apply¹⁰.

Mileage limits can be restrictive if you need the car for long distances, and charges may apply if you go over the limit or return the car in poor condition⁶. Before agreeing a limit, it is worth working out your realistic annual mileage, including any change of job or house move you expect during the term, because the limit is fixed for the whole agreement. If your circumstances change part-way through, some providers allow you to adjust the mileage allowance, but this usually changes the monthly payments or the guaranteed future value. The narrow guide to charges when you return a car at the end of PCP covers what can be billed and how to dispute it.

Your three choices when a PCP ends

When the contract ends you have three options: buy the car, swap it or return it³. StepChange sets out the same three: you can hand back the car at the end of the three years with nothing more to pay if you have not gone over the mileage limit or damaged the car, or you can buy the car by paying the amount left over¹.

1. Buy the car. Pay the balloon payment and the car becomes yours². SEAT's PCP terms describe paying the optional final balloon payment plus a £10 option to purchase fee to own the vehicle¹¹. If you want to keep the car but cannot settle the balloon payment in one go, some providers let you refinance the outstanding amount instead¹⁰.
2. Swap it. Trade the car in for a new one on a new PCP agreement⁷. If the car is worth more than the guaranteed future value, the surplus can go towards the deposit on the next car.
3. Return it. Give the car back and there will be nothing to pay, providing you have honoured the terms of the agreement and the car is not damaged⁷. Excess mileage or condition charges will still be billed if they apply¹⁰.

The full guide to what happens at the end of a PCP agreement works through each choice, including how the timing of the balloon payment and any part exchange value interact.

Ending a PCP early: settlement and voluntary termination

There are two main routes out of a PCP before the end of the term, and they work very differently.

The first is early settlement. If you want to end your agreement early, you can request a settlement quote, and how far into your agreement you are will affect the amount left to pay¹⁰. SEAT's PCP terms say the same¹¹. Settling means paying off everything you owe, after which the car is yours outright. There may be penalties for changing or ending a PCP car finance contract before the end of the term². The guide to how a car finance settlement figure is worked out explains what goes into the quote.

The second is voluntary termination, a statutory right under the Consumer Credit Act 1974. If you have a PCP or HP agreement, the Consumer Credit Act 1974 gives you the right to end it at any time before the final payment is due and hand the car back⁵. Advice NI describes this as Voluntary Termination, or VT: the provisions of the Consumer Credit Act give you the statutory right to terminate your HP or PCP agreement at any time¹².

The conditions are specific:

• You need to have paid at least half of the total amount payable, so if you have paid less you will need to make up the difference⁵.
• In a PCP agreement, the Guaranteed Future Value, often referred to as the balloon payment, must be included in the total amount payable when working out whether you have reached the 50% mark¹².
• You must have taken reasonable care of the car⁵.
• You cannot voluntarily terminate if your lender has already defaulted the account¹².

National Debtline adds a related rule on timing: if the lender has not already terminated the agreement, you can voluntarily terminate at any time before the last payment is due¹⁷. Separately, if you choose to end the agreement early yourself rather than using voluntary termination, you normally have to pay 50% of the total amount payable¹⁸. You can also return the car early if you find you cannot afford the payments, but you could have more to pay if you do this¹. The comparison of voluntary termination or early settlement sets the two routes side by side.

Missed payments, repossession and your credit record

A PCP is a secured debt: the loan is secured against the car⁷, and with a PCP or HP agreement the debt is secured against the car¹³. That means the consequences of missing payments are more serious than on an unsecured personal loan, where the lender cannot take the car back¹. With a lease or hire agreement, the finance company can take the car back if you miss payments¹.

The sequence usually runs like this. Any missed or late payments can negatively affect your credit score². You normally need to miss two or three payments before a default notice is issued¹⁷. The lender may then take further action to collect the debt and recover the car, possibly using a debt collection agency or applying for a county court judgment¹. Volkswagen Financial Services and SEAT both state in their PCP terms that failure to keep up repayments can impact your credit rating and result in the vehicle being repossessed¹⁰. Information about missed payments is normally kept on your credit reference file for six years, and it can affect your ability to get credit during that time¹⁷. Missed payments go on your credit file and can make it harder to get credit in future and to remortgage²⁰.

There is one protection worth knowing about. If you have paid one third of the total amount payable under the finance agreement, the car becomes a "protected good". In reality this does not provide much protection, as it merely requires the lender to get a court order to repossess the car¹². National Debtline adds that if a lender breaks this rule and repossesses protected goods without a court order, it risks having to refund all the money you have paid under the agreement¹⁷. Business Debtline flags a PCP-specific risk: because less than a third of the total amount payable may have been paid before the end of the agreement, the creditor may be able to repossess the vehicle without getting a court order first¹⁸.

If you are struggling, free debt advice is available before the situation reaches repossession. Charities including StepChange and National Debtline can talk through options such as a debt management plan, and missed payments are recorded on your credit reference file whether or not you set one up¹. The guide to what to do if you cannot pay your car finance covers the steps in order, and the wider guide to what to do if you can't repay a loan applies to any borrowing.

Selling a car that is still on PCP

You cannot sell a car on PCP, because it does not belong to you¹. When you buy a car with PCP, the finance provider still owns the car¹, and you do not own it until you have paid off the loan in full²¹. For that reason a private sale is not legally permissible without the lender's involvement¹². It is against the law to sell a vehicle under finance until you pay off the finance in full²².

If you want to sell, perhaps because you feel you will get more for the car than your lender would, you will need to seek the lender's permission before agreeing to sell¹². The practical route for most people is to request a settlement figure, pay off the finance in full, and only then complete the sale. This contrasts with an unsecured personal loan used to buy a car, where you can sell the car at any time because the loan is not tied to it¹.

This is also why buying a used car privately carries a risk on the buyer's side: a car can still have outstanding finance attached to it. The narrow guide to buying a car with a logbook debt still on it and the guide to selling a car that is on finance cover the checks and the position of each side.

Cooling-off, faulty cars and complaints

Under the Consumer Credit Act 1974, you have a 14-day cooling-off period in which to change your mind and cancel a credit agreement²³. The 14-day period starts from the day the agreement is concluded or, if later, from when you receive a copy of the agreement²³. Which? gives the same rule for cancelling a loan²⁴. One important limit: while the credit agreement can be cancelled, the contract for the item or service itself will not be affected, so if you use the cooling-off period to cancel the finance, you may still owe money to the dealer for the car²⁴. Which?'s advice on buying a car adds that where finance is involved, the dealer will have to refund the finance company rather than you directly, and the finance company will then have to terminate your agreement and pay you back your deposit plus any payments you have already made, minus any deductions for fair usage²⁵.

If the car itself turns out to be faulty, the finance angle matters. If you bought your car with a finance package like a PCP or HP, or a lease, technically the car belongs to the finance company, and it should be able to help you through the process of pursuing the dealer²⁶. Complaints about the dealer can be taken further if the dealer does not resolve them, and the guide to complaining about a car dealer covers the position when the car is on finance.

For complaints about the finance itself, the Financial Ombudsman Service is the free, independent body that can look at disputes with lenders. In the specific case of a financed car being written off, the ombudsman has said that where a new vehicle replacement was agreed with the finance company, the insurer should provide one²⁷. The guide to complaining about a lender or finance company sets out the process in order.

PCP and the motor finance redress scheme

On 30 March 2026 the Financial Conduct Authority announced the motor finance consumer redress scheme²⁸. PCP agreements are covered: the scheme includes hire purchase agreements such as Personal Contract Purchases²⁸. You may be owed compensation if you used car finance for a motor vehicle between 6 April 2007 and 1 November 2024, for example a car, motorbike, van or campervan, including hire purchase agreements such as PCPs²⁸. Which? reports that millions of drivers are set to get around £830 each under the free redress scheme covering deals from 2007 to 2024²⁹.

The scheme deals with undisclosed commission. Car finance loans taken out in the covered period are eligible if you were not clearly told that your dealer or broker was allowed to set a higher interest rate just to earn a bigger commission, that the commission was very high, meaning at least 10% of your loan or 39% of the total cost of credit, or that your dealer only worked with one specific lender and did not look for other deals for you²⁹. The FCA has launched a redress scheme for borrowers, which it estimates will cost lenders £9.1 billion³⁰. The FCA's own press release puts the total at £7.5bn if 75% of eligible consumers claim³¹.

There are limits. The scheme's rules set a total amount of credit threshold that rises by year: £38,000 for agreements entered into in 2008, £39,000 for 2009, £45,000 for 2011, £47,000 for 2012, £51,000 for 2013 and £56,000 for 2014³². Before 6 April 2008, a personal credit agreement providing credit exceeding £25,000 fell outside the definition of a regulated agreement under the Consumer Credit Act and so would not be a motor finance agreement for the scheme³². Personal contract hire leases are excluded: you are not covered if you leased a car with PCH²⁸. And this type of borrowing is not covered by the Financial Services Compensation Scheme, so if your lender goes out of business the FSCS does not step in²⁸. The full guide to the motor finance redress scheme covers eligibility and how to claim, and the guide to complaining about a commission arrangement covers using a claims firm.

Who provides PCP in the UK

PCP is offered through several channels, and the same agreement can come from very different places.

• Bank-owned finance arms. Lloyds Bank offers car refinancing including PCP spread over 1 to 4 years¹³, and Bank of Scotland offers a PCP car plan with terms up to 49 months¹⁴. HSBC publishes guidance on how PCP works².
• Manufacturer finance arms. Volkswagen Financial Services and SEAT's finance arm both publish full product information guides for their own PCP products, including the guaranteed minimum future value, wear and tear standards and settlement process¹⁰. Most major car brands have an equivalent arm.
• Dealerships and brokers. Car finance is typically arranged through the dealership or a finance company⁶, and the finance is normally from a company separate to the garage or dealership¹.
• Online and app-based lenders. Zable publishes guidance on car finance including PCP terms of usually 2 to 5 years⁵.

The guide to car finance companies describes the main lenders in the market and how to find out who your finance was with. Because the finance company owns the car throughout the agreement, knowing who actually holds your agreement matters more than knowing which dealer arranged it: the finance company is who you contact for a settlement figure, for voluntary termination, and for any complaint.

Where to get free help

Free, independent help with PCP problems is available from several places, and none of them charges for advice:

• StepChange Debt Charity covers car finance debt, including what happens if you cannot afford the payments and the options for returning a car early¹.
• National Debtline publishes guides on car repossession and on hire purchase and PCP debt, including voluntary termination and the protected goods rule¹⁷.
• Business Debtline covers HP and PCP debt for the self-employed¹⁸.
• Advice NI covers car finance including PCP, selling restrictions and voluntary termination for consumers in Northern Ireland¹².
• The Financial Ombudsman Service handles complaints about finance companies, including commission complaints on car finance²⁷.
• The Consumer Council for Northern Ireland publishes information on the Motor Finance Redress Scheme²⁸.

If payments have become unaffordable, getting advice before missing payments matters, because missed payments are recorded on your credit file whether or not you later arrange a debt solution²⁰. Mental Health and Money Advice also publishes guidance on which bills to prioritise when money is tight, and car finance secured on the vehicle is among the commitments with serious consequences if it falls behind³³. The debt section of this site brings together the options, from informal arrangements to formal solutions, and the guide to what to do if you can't repay a loan is the place to start.