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What is Personal Contract Purchase and how does it work?

Car leasing is a popular way to rent a car on a long-term contract and is growing in popularity in the UK as people seek to borrow cars and remove ownership responsibility.

Plus, most people don’t have the hard cash needed to buy a car that suits their lifestyle, so leasing allows you to spread payments and find a vehicle that fits your lifestyle and budget.

Lady Researching on Laptop

If you’re thinking of leasing a car, you’ll want to get an understanding of all the different types of lease agreements. In this guide, we’re going to explain what personal contract purchase is and how it works. 

What is Personal Contract Purchase?

Personal contract purchase (PCP) is a type of lease contract and the most popular way to lease a car.

The car is yours to drive throughout the agreement; when the contract is over, you can either hand the vehicle back or pay a balloon payment to own it.

This agreement gives you full flexibility and freedom to choose what suits you at the end of the contract.

You can either save money, pay the balloon payment, hand the car back, and find another deal.

What’s the difference between personal contract purchase and personal contract hire?

Personal contract hire gives you options at the end of your lease contract, making it more flexible. Personal contract hire doesn’t give you options; it’s more rigid. At the end of a personal contract hire agreement, you have to hand the vehicle back at your contract’s end.

How does Personal Contract Purchase work?

The first thing you need to do when you’ve decided to lease a car is think about whether you’re going to save up a deposit or use your current vehicle as a part exchange.

Deposits or part exchange

If you’re going to lease a car, we’d recommend saving a deposit or using your current vehicle as a downpayment. A deposit will help take your monthly payments down and keep them as low as possible. Deposits used to be compulsory from most lenders, but you can get zero deposit lease deals from lenders who specialise in getting loans for people that can’t or don’t want to save up.

Part Exchange Car

Your loan amount and car

Once you’ve decided what to do with your deposit, you’ll want to think about your loan amount and vehicle. 

You can either contact a dealer direct, get your loan in place and let them help you find a car. For example, if you know you want to stay within a monthly budget of £250 and need a car fast, trawling around various websites can take time and effort you don’t have. You may notice your vehicle isn’t in stock either, but most dealers will source cars for you.

Or you can search for a car within your budget and then get in touch with a dealer. This approach is better for people who have more time, want to shop around for the best deal or don’t have an affinity to a particular leasing company.

If you’re thinking of buying the car, you’ll also want to give yourself the chance to do it, leasing an expensive car, and not afford the balloon payment will make that decision for you.

Use our ‘Help Me Find a Car’ tool to get started finding your next car.

Your agreed yearly mileage

Lease deals work by giving you an agreed yearly mileage; mileage affects the car’s value, so the lender needs to know how many miles you intend to so. You’re better off overestimating as there are charges for going over your agreed mileage.

Your lease duration

You’ll have to decide how long you want your contract to run, which can be between 1-5 years, although some companies offer short term lease deals. If you lease a new or nearly new car, they’re covered under the manufacturer’s warranty, usually 3-4 years.

Once you’ve been through this process you’ll have something like this:

  • New Audi A4 Saloon / £0 deposit / £244.50 per month / 3-year lease and three-year manufacturer’s warranty.

How is my monthly rental amount calculated?

Your monthly rental amount will be a combination of the following:

  • The cost of the vehicle
  • The contract period
  • How much the vehicle is likely to be worth at the end of the contract
  • Mileage allowance
  • Any extras, such as a maintenance contract

What happens at the end of a Personal Contract Purchase?

Car Keys

At the end of a personal contract purchase, there are two options available to you, hand the car back or buy the vehicle. 

If you want to hand the car back, you can do so by taking it back to your dealer; they can even get another lease deal for you to drive away in a new car on the same day.

If you want to buy the car, there are a couple of options. The first option is to pay the lump sum balloon payment. However, if you haven’t managed to save the required amount of money you can ask to refinance the car. 

This means you’ll enter a hire purchase (HP) finance agreement, which is the same set up as a lease payment, but you’re paying to own the vehicle.

What are the pros and cons of Personal Contract Purchase?

Pros:

  • The most flexible lease agreement.
  • May be able to refinance the car and buy it.
  • Drive a new or nearly new car without having the responsibility of ownership.
  • Fixed monthly rentals, making budgeting easier.
  • Lower monthly payments as you aren’t paying for the cost of owning the car.
  • If the car does depreciate more in value than was expected, you won’t incur any charges.
  • Bespoke contracts, you control mileage, car and your lease duration, so you’re always in control.
  • If you keep leasing new cars, you’ll always have cover in your manufacturer’s warranty.
  • Drive a car you wouldn’t usually be able to access.
  • Cover servicing costs by adding a maintenance package, taking more responsibility away from you.

Cons:

  • Exceeding your agreed mileage will incur costs, and you can’t amend your mileage after you’ve signed the contract.
  • If you choose to hand the car back and don’t stay within the fair wear and tear guidelines, you’ll be subject to charges.
  • If you can’t refinance, you’ll have to pay a lump sum to own the car.
  • You don’t own the car during the agreement.
  • If you don’t keep up with payments, the finance company can take the car back.
  • If you want to end the lease, early termination fees can be considerable.

Can I cancel a Personal Contract Purchase?

As with any finance agreement you’ll have the option to cancel your lease in the 14-days cooling off period. Before your lease deal is 50% paid you’ll incur any costs associated with paying the contract off, which could be paying the full loan amount. 

Once your contract is 50% paid, you can return the vehicle. However, this does come with costs such as any interest or fees you may owe, and you’ll have to pay the balloon payment, so it isn’t a case of simply taking the car back.

If you aren’t at the 50% mark yet, you can pay the remainder of your loan to get there. For example, if you’ve paid £20,000 and the loan is £50,000 you can pay £5,000 to get to the 50% mark.

What happens if I crash the car?

If you have fully comprehensive insurance it’ll cover damages, but it depends on how much damage is done to the car. 

If you write the car off, the finance company will want to settle the loan, but the insurance payout may not cover the full loan amount.

This is why most lease companies offer a gap insurance bolt-on. If the car is written off and the payout not covering the loan, your gap insurance will cover you, so you don’t end up owing any money.

How do I get a cheap deal?

When you’re looking for a personal contract purchase deal, you’ll have to look at the cars initial rental and how much you’ll be paying per month as these are your main expenses.

Also, consider your contract duration when you’re looking at your lease, as longer contract usually indicate lower prices. You’ll also want to factor in the balloon payment if you’re thinking about buying the car.

One thing we always advise is checking out your credit score; it’ll play a big part in how cheap your deal is, and a few small changes can improve it before you make an application.

Can I get a Personal Contract Purchase deal with bad credit?

While it’s better to have good credit, you can get accepted for a personal contract lease deal if you have bad credit, CCJs, IVA, or even bankruptcy. You can’t guarantee acceptance, so be wary of any companies that offer this. Every case is judged separately; even people with good credit can get refused.

How do I find out if I’m eligible for Personal Contract Purchase?

There are certain things you need to provide to determine whether you’re eligible to apply for personal contract purchase:

  • You have to be 18 or above.
  • You need to have a full UK driver’s license.
  • Three years worth of address history.
  • Three years worth of employment history.

It isn’t a necessity, but we would advise you to get an idea of your credit history as this will give us an idea of whether you’ll be able to access the cheapest deals.

How do I get started?

Leasing with Zero Deposit Leasing is simple; all you have to do is:

  1. Search for a car or use our free soft credit check tool to see if you’re preapproved for car finance (no impact on your credit score).
  2. Liaise with your account manager, who’ll go through the application with you.
  3. Once we arrange your finance, you can pick your car up from our Blackburn showroom or arrange nationwide delivery.

Use our car search to find the car you want!