PCP Car Finance
For Bad Credit

What is PCP?

Personal Contract Purchase (PCP) is a popular car finance option that offers flexibility and affordability. Unlike traditional car loans, PCP focuses on covering the depreciation of the car rather than its full cost. This means your monthly payments are generally lower compared to other finance options.

Under a PCP agreement, you make an initial deposit followed by fixed monthly payments over an agreed term. These payments only cover the car's value depreciation during the contract period. At the end term, you’ll have three options: return the car, make a final balloon payment to own it, or use its future value as a part exchange for another vehicle.

PCP is ideal if you prefer lower monthly repayments and flexibility at the payment end. However, factors like annual mileage and the car's condition can affect your final payment and the car’s future value.

Can I get a PCP finance with a bad credit score?

Yes, you can get PCP car finance even with a bad credit score, but the process may involve additional considerations. Most lenders assess eligibility through a credit check, which helps determine your ability to repay the loan. While a poor credit history might limit your options, it doesn’t necessarily disqualify you.

When you apply for PCP, lenders evaluate factors like your credit rating, annual income, and the initial deposit you can offer. A soft credit check may be conducted initially to gauge your likelihood of approval without impacting your credit score. Some lenders specialise in helping customers with bad credit, tailoring their finance deals to suit individual circumstances.

At Carboom, we work with a range of credit brokers and finance companies to find solutions for various credit backgrounds. Even if your credit history isn’t perfect, you can still secure a finance deal by putting down a higher deposit amount or choosing a car with a lower total cost. It’s important to consider the interest rate, representative APR, and total amount payable to ensure the deal fits your budget.

How does PCP finance work?

PCP car finance simplifies borrowing by splitting the cost of a vehicle into manageable parts. Here’s a step-by-step guide to how it works:

1. Choose a car and agree on terms
   

   Select a new or used car, decide on the loan term, annual mileage limit, and initial deposit. These factors determine your monthly payments and final balloon payment.

2. Pay an initial deposit
   

   The deposit amount reduces the total cost of the car and impacts the size of your fixed monthly repayments.

3. Make monthly payments
   

   Your monthly payments cover the car's depreciation during the term, based on its future value at the agreement's end.

4. Decide at the end of the term
   

   At the end term, choose to:

   • Pay the optional final payment (balloon payment) to own the car outright.
   • Return the car without additional payments (subject to mileage and condition).
   • Use the car’s value as a part exchange for a new finance deal.

Personal Contract Purchase example

Let’s break down a Personal Contract Purchase (PCP) deal with numbers to make it clearer. Suppose you’re financing a used car valued at £20,000. Here’s how it might work:

1. Deposit: You pay an initial deposit of £4,000, reducing the loan amount to £16,000.
2. Loan term: Over a 3-year agreement, you make fixed monthly payments of £250, which cover the car’s depreciation during this period.
3. Balloon payment: At the end of the term, the car’s future value (guaranteed minimum value) is estimated at £10,000. This is your optional final payment if you want to own the car outright.

You can either pay the balloon payment, return the car, or use its valuation as a part exchange toward a new finance deal. This flexibility is why PCP is a preferred option for many buyers.

What is the difference between Hire Purchase and Personal Contract Purchase?

Hire Purchase (HP) and Personal Contract Purchase (PCP) are two popular car finance options, but they work differently in terms of ownership, monthly payments, and flexibility. Here’s a detailed comparison:

While HP focuses on straightforward ownership with higher monthly payments, PCP offers flexibility and affordability. The best choice depends on your priorities, whether it’s owning the car outright or enjoying lower monthly costs with flexible options at the end of the agreement.

What are the pros and cons of PCP?

Personal Contract Purchase (PCP) is a flexible car financing option, but like any financial product, it has its advantages and disadvantages. Here’s a breakdown to help you decide:

Pros of PCP

• Lower monthly payments: You only pay for the car’s depreciation, not its full cost, which keeps monthly repayments affordable.
• Flexibility at end term: You can return the car, make a final balloon payment to own it, or trade it in for a new deal.
• Access to newer cars: PCP allows you to drive a higher-spec vehicle due to the lower monthly payments compared to other finance options.
• Fixed rates: Agreements often include fixed interest rates, ensuring predictable costs.

Cons of PCP

• Balloon payment: To own the car outright, you must make a large final balloon payment.
• Mileage restrictions: Contracts impose mileage limits, with excess mileage charges if exceeded.
• No ownership during the term: Until you make the final payment, the car belongs to the finance company.
• Potential for negative equity: The car’s value may drop faster than expected, affecting your options at the end agreement.

How can I make PCP more affordable?

There are several strategies to reduce the costs of Personal Contract Purchase (PCP) and make it more manageable. Here’s how you can approach it:

1. Pay a larger deposit

A higher deposit amount lowers the overall amount you need to borrow, which reduces your monthly payments. For example, increasing your deposit from 10% to 20% can significantly decrease the financial burden over the term.

2. Choose a longer payment term
   Extending the payment term spreads the cost over a more extended period, leading to lower monthly repayments. However, remember that longer terms may increase the total cost due to added interest rates.

3. Select cars with higher resale value

Cars that retain their value well are ideal for PCP. A higher future value means a smaller balloon payment and potentially lower monthly repayments. Researching models with minimal car depreciation can save you money.

4. Opt for a cheaper vehicle

Choosing a vehicle with a lower total cost reduces the amount you need to borrow, which directly impacts your monthly payments and final balloon payment.

5. Budget carefully

Use a finance calculator to plan your budgeting before committing. This helps ensure that your chosen deal fits within your financial means, avoiding missed payments that could affect your credit.

What are your full options at the end of the PCP deal?

When your PCP car finance term concludes, you have three main options to choose from, offering flexibility based on your preferences and financial situation:

1. Ownership
   Pay the balloon payment (also called the optional final payment) to take full ownership of the car. This option is ideal if you want to keep the vehicle long-term. Ensure you budget for this lump sum payment in advance.
2. Car return
   Return the car to the finance company with no further payments, provided it’s within the agreed mileage limit and in good condition. Excessive wear or excess mileage charges may apply. This is a good choice if you no longer need the car or wish to avoid further costs.
3. New car selection
   Use the car’s value as a part exchange toward a new finance agreement. This allows you to upgrade to a newer model while rolling over into a fresh PCP deal.

Is PCP a good idea for me?

PCP car finance can be a good option for those with a bad credit score, especially if you prioritise lower monthly payments and flexibility. It’s ideal for drivers who want access to newer vehicles without committing to full ownership. However, consider your driving habits—staying within the mileage limit is crucial to avoid additional charges. Assess your financial situation carefully to ensure the deal fits your budget and needs.