PCP finance splits the cost of your car into three – a deposit, followed by fixed monthly instalments, and an optional final payment if you want to own the car.
At the start of the contract, you’ll pay a deposit – essentially a larger first payment towards of the overall cost of the car (rather than a returnable deposit, such as you pay when renting a property). You will be told how much the monthly amount and the final payment will be, along with any other fees that might crop up.
During the contract term, which is usually between three to five years, you pay a set amount of money, or instalment, each month. This is made up of a repayment to the car finance company plus interest.
At the end of the agreement, you have a few choices. If you want to keep the car you’ll need to pay a small Option to Purchase (OTP) fee (usually about £10) and the final payment – known as a ‘balloon payment’ – that was set out at the start of the agreement.
Alternatively, you can hand the car back to the lender. There won’t be any additional charges unless the car is damaged or you have exceeded the agreed mileage limit.
Or, if the market value of the car is higher than the lender originally predicted, you can put the difference towards a new finance agreement, subject to your financial status.