PCP Car Deals Explained: What the Dealership Won’t Spell Out

PCP — Personal Contract Purchase — is one of those financing options that sounds almost too good to be true when the salesperson explains it. Low monthly payments, drive a newer car than you could otherwise afford, and at the end you can just hand the keys back. That’s the pitch, anyway.

I helped a friend work through a PCP deal last year and the details matter a lot more than the headline numbers. Here’s how it actually works.

How PCP Is Structured

A PCP deal has three moving parts. You put down a deposit — typically 10-20% of the car’s price. The lender then estimates what the car will be worth at the end of the contract period, which they call the Guaranteed Future Value (GFV). You’re only financing the difference between the car’s price (minus your deposit) and that GFV.

So if you’re buying a $30,000 car, put down $3,000, and the GFV is set at $15,000, you’re making monthly payments on $12,000 spread over 24-48 months. That’s why the monthly numbers look so much lower than a traditional loan — you’re not paying off the whole car.

When the contract ends, you get three choices: return the car and walk away, trade it in toward a new deal, or pay the GFV to own the car outright. Each option has implications worth understanding before you sign.

Where PCP Actually Makes Sense

The monthly payment advantage is real. For people who want to drive a newer, more expensive car than they could finance traditionally, PCP makes the math work. If you’re the kind of person who trades cars every three or four years anyway, PCP aligns with that pattern — you’re essentially paying for the depreciation you’d experience regardless.

The flexibility to walk away at the end is genuinely valuable if your circumstances might change. New job, growing family, different commute — you’re not locked into a car that no longer fits your life.

And for business users, the monthly payments are often tax-deductible, which can make PCP significantly cheaper on an after-tax basis than outright purchase.

The Catches Nobody Mentions at the Dealership

You don’t own the car during the contract. That matters more than people realize. You can’t modify it, you might face penalties if it’s damaged beyond normal wear, and you’re often restricted on annual mileage — typically 10,000-15,000 miles per year. Exceed that limit and you’ll pay a per-mile penalty at the end that can add up to thousands.

The total cost of financing is often higher than a traditional loan. Those lower monthly payments come at a price — you’re paying interest on the GFV amount for the entire contract period even though you’re not paying that amount down. Over the life of the deal, the total interest paid can be significantly more than a straightforward car loan.

If you decide to buy the car at the end by paying the GFV, you may end up paying more total than if you’d just financed the whole car traditionally from the start. The math depends on interest rates, but it’s worth running the numbers both ways before committing.

Negative equity is a risk if the car’s actual market value drops below the GFV. This shouldn’t affect you if you return the car (the “guaranteed” part of GFV protects you), but it means you won’t have equity to roll into your next deal — which makes the next PCP more expensive.

PCP vs. Traditional Finance vs. Leasing

Traditional car loans have higher monthly payments but you actually own the car when you’re done. Over the long run, buying and keeping a car for 8-10 years is usually the cheapest option. PCP splits the difference between leasing (pure rental) and buying (full ownership). You have more flexibility than a lease but less equity than a loan.

For people who keep cars until the wheels fall off, PCP doesn’t make financial sense. For people who want a newer car every few years without a large upfront investment, it can work out well — as long as you understand the total cost and stay within the mileage limits.

Before You Sign

Compare the APR, not just the monthly payment. Dealerships love quoting low monthlies while burying a high interest rate in the contract. Ask what the flat rate and APR are, and compare them against what you’d get on a traditional loan from your bank or credit union.

Be realistic about your mileage. If you commute 40 miles round-trip daily, a 10,000-mile annual limit will catch up with you fast. Paying for extra mileage upfront is cheaper than paying the penalty per mile at the end.

Check the condition requirements in the contract. Normal wear and tear is expected, but what counts as “normal” varies by lender. Some are reasonable; some will charge you for every door ding and coffee stain. Know the standard before you drive off the lot.