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How PCP Finance Works: Every Number on Your Agreement Explained
PCP is the most common way to finance a new car in the UK, but the agreement you sign is full of figures that are easy to skim past: amount of credit, APR, optional final payment, total amount payable. Each one affects what you pay and what you can do later, including whether you can hand the car back early.
This guide explains what PCP means, how the payments fit together, and what every number on your agreement is for.
What does PCP mean?
PCP stands for Personal Contract Purchase. It's a type of car finance where your monthly payments cover the car's expected drop in value over the agreement, not its full price. That's why PCP payments are lower than a loan or Hire Purchase (HP) for the same car.
A PCP has three parts:
- A deposit at the start
- Monthly payments, usually for 2 to 4 years
- An optional final payment (also called the balloon or GMFV) at the end, which you only pay if you want to keep the car
You don't own the car until every payment, including the final one, has been made. Until then it belongs to the finance company. At the end you choose whether to pay the final amount and keep it, hand it back, or part-exchange it: see what happens at the end of a PCP.
How PCP works: one example
Here's a typical 4-year PCP, so you can see how the numbers relate. Figures are illustrative, rounded to the nearest pound, and leave out fees.
| Cash price of the car | £25,000 |
| Deposit | £2,500 |
| Amount of credit (what you borrow) | £22,500 |
| APR | 9.9% |
| Monthly payments | 47 × £382.25 |
| Optional final payment (month 48) | £11,000 |
| Total amount payable | £31,466 |
| Cost of the finance (interest) | £6,466 |
Where the £31,466 goes on a typical PCP
£25,000 car, 4 years, 9.9% APR. The final payment is over a third of the total.
- Deposit
£2,500 (8%) - 47 monthly payments
£17,966 (57%) - Optional final payment
£11,000 (35%)
Show the numbers
| Part | Amount | Share of total |
|---|---|---|
| Deposit | £2,500 | 8% |
| 47 monthly payments | £17,966 | 57% |
| Optional final payment | £11,000 | 35% |
| Total amount payable | £31,466 | 100% |
Two things stand out:
- The final payment is almost half the car's price. The monthly payments only cover the gap between the £22,500 you borrowed and the £11,000 the car is expected to be worth at the end, plus interest. That's what keeps them low.
- Half the total amount payable is £15,733. That's the point where you can hand the car back early with nothing more to pay, using Voluntary Termination. Because the £11,000 final payment counts towards the total, this driver doesn't reach it until around payment 35, almost three years in.
The numbers on your agreement
You'll find these on your finance agreement and the pre-contract information you were given before signing. Here's what each one means.
Cash price
The price of the car before any finance. If the dealer offers a discount, it should show here.
Deposit
What you pay upfront. A bigger deposit means you borrow less, so monthly payments go down. Some deals also include a deposit contribution from the manufacturer or dealer, which reduces what you borrow without coming out of your pocket.
Amount of credit
The cash price minus your deposit (and any deposit contribution). This is what you actually borrow and pay interest on.
APR
The Annual Percentage Rate: the yearly cost of borrowing, including interest and any compulsory fees. Use it to compare deals. You may also see a fixed rate or flat rate, which looks lower than the APR but isn't comparable.
Monthly payments
On a 4-year deal this is often 47 payments, with the optional final payment due in month 48. Your agreement states the exact number.
Optional final payment (GMFV)
What you pay at the end to keep the car. It's normally set at the Guaranteed Minimum Future Value (GMFV): what the finance company guarantees the car will be worth at the end, based on your mileage allowance. A lower mileage allowance usually means a higher GMFV and lower monthly payments. If the car ends up worth less than the GMFV, you can hand it back and the finance company takes the loss.
Total amount payable
Deposit + all monthly payments + optional final payment + any fees. It's the most important number for exiting early, because your Voluntary Termination right is based on paying half of it.
Mileage allowance and excess charge
The miles per year you agreed to, and the pence-per-mile charge if you go over by the end, typically between 6p and 15p per mile. It only applies if you hand the car back. If you pay the final payment and keep the car, the mileage limit no longer matters.
Fees
Some agreements add a small option to purchase fee (often paid with the final payment) or an arrangement fee. Both count towards the total amount payable.
The numbers that change as you pay
Your agreement gives you the fixed figures. These three change every month, and they're what decide your options.
Settlement figure: what it would cost to pay off the finance today and own the car. It's your remaining balance minus a rebate of future interest. In the example above it's roughly £17,100 two years in. Our guide to how settlement figures are calculated has the full method.
Voluntary Termination point: how close you are to paying half the total amount payable. Once you're past it, you can hand the car back with nothing more to pay. Work yours out with the Voluntary Termination calculator guide.
Equity: your car's current value minus your settlement figure. Positive equity is money in your favour when you sell or part-exchange; negative equity is the shortfall. See how to check your PCP equity.
Your mileage position
Most PCP contracts have an annual mileage allowance. Go over it at handback and you pay the per-mile excess charge, so it's worth checking where you stand before the end, not after.
There are three useful numbers:
1. Whether you're currently over or under
Your allowance builds up day by day, so you can check your pace at any point. Compare the miles you've driven to the miles you'd expect to have done by now: annual allowance × years elapsed.
2. Your projected total at the end
Take your current daily pace and carry it across the days left on your contract. If that projection is over your total allowance, multiply the difference by your excess rate to get the likely charge.
3. Your daily budget
Your annual allowance divided by 365: the miles per day you can drive without eating into your allowance.
A mileage excess isn't the same as negative equity. You can be well within your mileage and still owe more than the car is worth, or the other way round.
Running the numbers for your own contract
You need six things from your agreement: cash price, deposit, monthly payment, optional final payment, start date and term length. Add your mileage allowance and current mileage to see your mileage position too.
No account needed. Results update as you type.
A note on accuracy
Any calculator's settlement and equity figures are estimates. Lenders vary in how they apply the interest rebate, and some contracts have clauses that affect the calculation. Always get a formal settlement figure from your lender before making a decision based on these numbers.
How EquityGo helps
Once you know what the numbers mean, EquityGo's PCP finance calculator works them out for your own agreement, and the free app keeps them up to date: your equity, Voluntary Termination point, settlement estimate and mileage position update as you log readings.
Get EquityGo on Google Play. Free to use, with a free 30-day Pro trial.
Sources
- Consumer Credit Act 1974, Section 99: right to voluntary termination
- Consumer Credit Act 1974, Section 94: right to settle early
- MoneyHelper: Personal Contract Purchase (PCP): UK government-backed guidance on PCP agreements