How to understand a PCP car finance quote

 

We get a lot of readers asking questions or looking for explanations about a personal contract purchase (PCP) car finance quote they have received from a dealer or seen online. This is not surprising, as a PCP quotation can look quite confusing.

In this article, we are going to go through a PCP finance quote line by line, and explain what each item means. We will tell you what to look out for, and what you can do to adjust each number to suit your needs. If you can understand every aspect of the quote, you are much likely to get yourself a deal that works for you rather than a deal that works for the car dealer.

Most buyers tend to focus on one line – the monthly payment figure. They will have a target of £X per month, and that’s all they are interested in. However, every aspect of a finance quotation is connected, so if you are trying to reduce a monthly payment quote to get it down to your target, that will inevitably mean compromising somewhere else. Tweaking one line of the quote will always affect several other lines, and you may end up worse off as a result.

PCP car finance quotation salesman
Don’t be distracted by the shiny things; focus on your financial limits.

For this article, I have taken a genuine PCP finance quotation from a large manufacturer finance company on one of the best-selling cars in the UK. However, everything you read below will apply to any PCP finance quotation.

The reason we are using a PCP quotation is because it is by far the most popular type of car finance for retail car buyers in the UK. More than 80% of all private new car buyers will use a PCP to buy their vehicle, and a rapidly growing number of used car buyers as well.

If you want even more information about any of the technical jargon used in this article, check out our comprehensive car finance glossary that explains everything in plain English.

PCP car finance quote example*

Duration48 months
Monthly payment£249.00
Customer deposit£2,915.84
Deposit contribution£1,500.00
Retailer cash price£21,025.00
Acceptance fee£0.00
Optional final payment£7,361.10
Option to purchase fee£10.00
Total amount payable£23,489.94
Total amount of credit£16,609.16
Representative APR %5.2% APR
Rate of interest5.18% fixed
Annual mileage allowance10,000
Excess mileage (per mile)4p

*example is an actual finance quotation taken from a top-selling vehicle in the UK, current as of 10 June 2018

Duration

The duration is also called the term. In this case, the 48 months shown actually consists of 47 regular monthly payments one large final payment, also called the balloon or guaranteed (minimum) future value (GFV/GMFV).

A PCP car finance agreement can usually run for anywhere between 18 months and 48 months. As a rule, a shorter term is better as you are paying your debt off faster. Be very cautious of anyone trying to offer you a PCP longer than 48 months.

If you want to make the duration shorter, you can:

  • increase your upfront deposit
  • increase your monthly payment
  • choose a cheaper car

Monthly payment

This is the number that most buyers are looking at – how much will this car cost per month? However, it’s only one part of the equation, and you have to make sure that every other aspect suits your needs.

The question of “How do I bring my monthly payments down?” is very common but there’s no magic here answer. Reducing the monthly payment will require you to accept a less-desirable change somewhere else, and concentrating only on the monthly payment can lead you into trouble.

If you want to bring this payment down, you can:

  • choose a cheaper car
  • increase your upfront deposit
  • reduce your annual mileage
  • take a longer term (max. is usually 48 months; see above)
  • negotiate a discount on the price of the car
  • negotiate a discount on the interest rate on the finance

Customer deposit

This is the amount you are paying up front. The word “deposit” can be confusing; you won’t get this money back again at the end of the agreement. The more money you put in at the start, the less you will have to pay per month. Conversely, the less you put in to start off, the more you will have to pay each month.

If you want to bring this payment down, you can:

  • choose a cheaper car
  • increase your monthly payment
  • reduce your annual mileage
  • take a longer term
  • negotiate a discount on the price of the car
  • negotiate a discount on the interest rate on the finance

Car dealers will often encourage you to put in less deposit and increase your monthly payment, and a common phrase they will use is “dead money”. Don’t be fooled; they’re saying this because it suits them. They get commission on every pound that you borrow, so if you reduce your deposit by £1,000 you will be increasing your debt by £1,000 and they will get more commission. Do what is right for you.

Part-exchange vehicle
If you have a part-exchange vehicle, that can be used as a form of deposit. If the dealer values your car at £2,000 then that’s the same as a £2,000 cash deposit. If you have outstanding finance on your vehicle, it’s value will be the net result of its value minus the finance. So if your car is valued at £8,000 but you still owe £7,000 to the finance company, it’s only a £1,000 deposit.

If your car is valued at £8,000 but you still owe £9,000, that’s called negative equity and it means you have to pay £1,000 to get rid of your car before you can start thinking about additional deposit towards your new car.

Deposit contribution

A deposit contribution is basically a discount for taking the finance agreement; in the example above, it’s £1,500. Instead of taking £1,500 off the price of the car, the dealer is giving you £1,500 towards the price of the car. It’s kind of the same thing, but it can have advantages if you need to voluntarily terminate the agreement later on.

This amount is usually offered as part of a national campaign on a particular model, and is available from any dealership for that manufacturer. It’s a discount/offer, so it won’t be available on any model. It’s rare to see a deposit contribution on a used car.

Dealers will often offer to use this deposit contribution to cover any negative equity you have in your current car (see above), so you don’t have to find the cash to settle the outstanding finance. This means that there will be little or no contribution left towards the new car, so you are making your new car more expensive by doing this.

Retailer cash price

This may be listed as total on-road price or something similar. It’s basically the overall price of the car, including any extras you have added and other costs like road tax.

If you want to bring this payment down, you can:

  • choose a cheaper car
  • remove unnecessary extras like GAP insurance or paint (the dealer will hate that, but that’s because they make a lot of commission on those extras)
  • negotiate a discount on the price of the car
  • negotiate a discount on the interest rate on the finance

Acceptance fee

This will vary between different finance providers, and may or may not be relevant. Almost all PCP contracts will have fees of some sort (unless they specifically say 0% APR). In this particular case, there is no fee here.

Optional final payment

This is the amount you will still owe at the end of the term, also known as the balloon. In a PCP agreement, this amount is the same as the guaranteed future value (which is technically a different thing, but for a finance quote it doesn’t matter).

This amount is what the finance company expects the car to be worth at the end of the agreement. So in this case, the car starts out at £21,025.00 new, and after four year and 40,000 miles it should be worth £7,361.10. That’s 35% of the starting price, which is pretty normal.

The higher this payment is, the lower your monthly payments will be. If you want to keep this payment as high as possible to reduce your monthly payments (which is likely if you’re not planning to make the final payment and keep the car), you can:

  • reduce your annual mileage allowance
  • remove any unnecessary options (like a sunroof or upgraded stereo) and extras (like GAP insurance or paint ) that increase your starting price but don’t increase the final value
  • stick with the most popular colour and trim combinations (unpopular colours and personalisations can devalue your car)

The finance company will try to take this payment on direct debit unless you hand the car back or part- exchange it before the due date. For more information, have a read of our article about your options at the end of a PCP.

Option to purchase fee

Again, every finance company will charge fees here or there. In this example, if you choose to pay the £7,361.10 to keep the car at the end of the agreement, you will also have to pay an extra £10 admin fee. Yes, you’re right – it does seem petty.

Total Amount Payable

This is an important number, as it reflects the cost of the car the interest and fees you pay as part of the finance. In this case, the total of £23,489.94 means it is costing you £2,364.94 in interest and fees to finance the car over four years.

This amount equals your deposit (£2,915.84), the seller’s deposit contribution if available (£1,500), 47 monthly payments of £249 each, the final payment of £7,361.10 and the final £10 fee.

If you want to bring this payment down, you can:

  • choose a cheaper car
  • take a shorter term (thereby paying less interest)
  • remove unnecessary extras like GAP insurance or paint
  • negotiate a discount on the price of the car
  • negotiate a discount on the interest rate on the finance
  • find a finance agreement with a lower APR (interest rate)

What the quote is not required to show is your total debt, which is the amount you ultimately owe the finance company. It is the total amount payable minus your deposit and any deposit contribution. In this case, the debt would be £19,074.10. A significant amount of debt may affect your ability to borrow money for a house or get credit for other purposes (credit card, phone, personal loan, etc.). Obviously you will make inroads to this debt each month with your repayments so your debt will change each month. If you settle the finance early, it will reduce the overall debt because you’re borrowing the money over a shorter term.

Voluntary termination
Another reason that the total amount payable is important is because it is used to calculate your voluntary termination point, which is 50% of the total amount payable – in this case, £11,744.97.

Based on the deposit (£2,915.84) deposit contribution (£1,500) and monthly payments of £249, you would reach this 50% mark after 30 months in this example contract.

For more information, check out our guide to voluntary termination of a PCP or HP.

Repossession
Your repossession rights are also determined by the total amount payable. If you have repaid less than a third of the total (in this case, £7,829.98, which you would reach in about 14 months) and you default on your payments, the finance company has the right to repossess the vehicle.

Once you have repaid more than a third of the total amount payable, they would have to get a court order to repossess the vehicle. In practice, that means they may be a little more patient with you before going to the effort of trying to repossess your car, as going to court costs money with no guarantee that they would win.

Total amount of credit

This is the amount of money you are borrowing, and is equal to the price of the car (£21,025) minus your deposit (£2,915.84) and the deposit contribution (£1,500).

It’s a common misconception that you’re not borrowing the balloon amount – not true at all. You are borrowing that £7,361.10 and paying interest on it, but you are not repaying it unless you decide to make the final payment at the end of the agreement.

If you want to bring this amount down, you can:

  • choose a cheaper car
  • increase your up-front deposit
  • negotiate a discount on the price of the car
  • negotiate a discount on the interest rate on the finance
  • find a finance agreement with a lower APR

Representative APR

APR stands for Annual Percentage Rate, and includes all the interest and fees you have to pay on the finance agreement. It is essentially the cost of taking out finance, and obviously a lower number is better than a higher number.

If you are looking at a finance quote that has been prepared specifically for you rather than an advertsied example, it may simply say “APR” rather than “Representative APR”.

A Representative APR is the rate that at least 51% of applicants must be offered, but you may not be offered this rate. The Representative APR in this example is 5.2%, but you may only be offered a higher rate (say, 7.5%)  if the finance company thinks you are a higher-risk customer.

If you want to bring this amount down, you can:

Rate of interest

APR includes interest AND fees; this is the interest component. In this example, the interest rate is 5.18% but the APR is only 5.2%, which means that there are very few fees that only make up 0.02% of your cost of borrowing.

This can be important because interest and fees are different. Interest is spread across your monthly payments, whereas a fee is charged in one hit. For any given APR, it’s usually better to be paying more in interest and less in fees.

Negotiate a better rate
If you are buying a car as part of an advertised campaign offer, there may not be any additional room for negotiation on the interest rate. However, in any other case (and especially on a used car), there is normally an opportunity to negotiate a percentage point or two off the interest rate. If you can save 1% on your interest rate, that might be a much better result than haggling over a few hundred pounds off the price of the car.

Annual mileage allowance

For too long, this number has been buried in the fine print. It should be up there with all the other information, like it is in our example above – especially if you are looking at a specific finance quote prepared for you rather than an advertised example.

This number should reflect the number of miles you expect to do each year – the national average is about 10,000, which is what the example above shows. However, many dealers and finance companies are now quoting customers on much lower mileage figures (often 6,000 per year) unless you specifically nominate a higher mileage.

Why do they do this? Well, a lower annual mileage will make your final payment higher, which will reduce your monthly payments and/or your up-front deposit. The problem is that if you go over your mileage allowance, the finance company will charge you an excess mileage penalty (see below).

Make sure your mileage allowance reflects your driving requirements, and be realistic about it rather than optimistic.

Excess mileage

This is what the finance company will charge you for every mile you go over your allowance for the term of the agreement. It only applies if you are giving the car back to the finance company at the end of the agreement and claiming the guaranteed future value. For more information, have a read of our article about your options at the end of your PCP agreement.

This example is a 48-month (four-year) PCP with an annual mileage allowance of 10,000 miles, which means the total mileage allowance over the entire agreement would be 40,000 miles.

The excess mileage penalty fee in this example is 4p per mile, which works out to £40 for every 1,000 miles that you exceed your allowance. That’s actually quite low, but will still be more than you’d pay if you set the mileage correctly in the first place.

Summary

Ultimately, there’s no such thing as a perfect finance quote. As you can see above, a number of the variables above can be adjusted to suit your particular needs.

For example, if you increase your deposit then you pay less per month. That might suit you but may not suit another buyer, who may not have the cash available and would therefore prefer to pay a bit more per month in order to pay less up front.

Likewise, one buyer may prefer to wear a higher monthly payment in order to have a three-year PCP, while another buyer may prefer a lower payment over four years.

You need to work out what suits your financial circumstances, and don’t be charmed or bullied by a dealer who wants you to borrow more money or put in less deposit – they are doing this because it suits them, not because they’re trying to help you.

customer signing PCP car finance contract
Have you followed The Executivecondominium’s advice? Good, you can sign that contract now.

Stuart Masson
Stuart Massonhttp://executivecondominium.info/
Stuart is the Editorial Director of our suite of sites: The Executivecondominium, and . Originally from Australia, Stuart has had a passion for cars and the automotive industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.

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2 COMMENTS

  1. Do I have to take the car back to the dealer I got it from on PCP or can I go to another dealer who also does PCP deals i.e car came from Renault but I’ve seen a car at JCT 600. Can I swap my car’s PCP deal and use JCT 600 to get another car on PCP? kind regards julie

    • Hi Julie. No, you can go to another dealer and another brand if you want to. The dealer where you are buying your next car (ie – JCT 600 in your case) will help you settle your PCP with your previous dealer.

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