MB
Mustafa Bilgic
Financial content writer covering UK car finance, personal loans, and consumer credit. Updated February 2026.
What Is PCP Car Finance?
PCP (Personal Contract Purchase) is the most popular form of car finance in the UK, accounting for over 75% of new car finance agreements. It allows you to drive a new or used car by paying a deposit, followed by lower monthly payments than equivalent HP finance, with an optional large final payment if you want to own the car outright.
Unlike a standard hire purchase deal, you do not automatically own the car at the end of a PCP agreement. Instead, you choose from three options: hand the car back, pay the balloon to keep it, or use any equity as a deposit on a new car.
How PCP Finance is Structured
1. Deposit
Paid upfront. Reduces the amount financed.
2. Monthly Payments
Fixed for 24–48 months. Lower than HP.
3. End-of-Term Choice
Hand back, pay balloon, or part-exchange.
The Three Elements of PCP
- Deposit: A cash or part-exchange deposit reduces the total amount financed. A higher deposit means lower monthly payments.
- Monthly payments: You are financing the depreciation of the car (the difference between the car's current value and its predicted future value), plus interest on the total balance.
- Balloon payment (GMFV): The Guaranteed Minimum Future Value is set by the lender at the start. It represents the predicted value of the car at the end of the term. This is what you pay if you want to keep the car.
PCP Example: £25,000 car, £3,000 deposit, 36 months, 8% APR, GMFV £12,000
Amount financed = £25,000 − £3,000 = £22,000. Monthly payments finance the depreciation (£22,000 − PV of £12,000) plus interest on the full £22,000 balance. Approximate monthly payment: £340. Total paid if buying: £15,240 payments + £3,000 deposit + £12,000 balloon = £30,240. Total interest: approximately £5,240.
Understanding the GMFV (Balloon Payment)
The GMFV is the cornerstone of PCP finance. The lender uses residual value data (from sources such as CAP HPI) to predict what the car will be worth at the end of the agreement. This amount is "guaranteed" — meaning even if the car is worth less than the GMFV, you can simply hand it back without owing the difference.
If the car is worth more than the GMFV at the end of the term (positive equity), you can use that surplus as a deposit on a new deal — a key reason many people prefer PCP for regular upgrades.
Mileage Allowance and Excess Charges
PCP agreements include an annual mileage cap, typically 8,000–12,000 miles per year. Exceeding this limit results in an excess mileage charge, usually between 3p and 15p per mile. On a 10,000-mile allowance agreement with a 10p/mile excess charge, driving 3,000 extra miles per year would cost £300 in charges at the end of the term.
Always be realistic with your mileage estimate. If you underestimate, you will face unexpected end-of-term charges. If you overestimate, you will pay a higher monthly premium for miles you never use (higher mileage = lower GMFV = higher monthly payments).
End-of-Term Options in Detail
Option 1: Hand Back
Return the car with nothing more to pay, provided it is in good condition and within the agreed mileage. Walk away with no asset but no further liability.
Option 2: Pay the Balloon
Pay the GMFV to own the car outright. You can use savings, a personal loan, or refinance the balloon. Only worthwhile if the car's market value exceeds the balloon.
Option 3: Part-Exchange
If the car is worth more than the GMFV, the equity becomes your deposit on a new PCP deal. This is the "equity rollover" that keeps many drivers in a perpetual PCP cycle.
PCP vs HP vs Cash: Which is Best?
| Factor | PCP | HP | Cash |
|---|
| Monthly cost | Lowest | Medium | Zero |
| Total cost | Highest (if buying) | Medium | Lowest |
| Own car immediately | No | No (own at end) | Yes |
| Flexibility | Highest | Medium | Low |
| Mileage restriction | Yes | No | No |
| Good for regular upgrades | Yes | No | No |
Negative Equity Risk in PCP
Negative equity occurs when your car's market value falls below the outstanding finance balance. This is a real risk if: the car depreciates faster than expected (electric vehicles can be particularly affected by rapid price changes), you increase the mileage beyond the agreed limit, or the car sustains damage that reduces its value.
If you are in negative equity and want to exit the deal early, you will need to pay the shortfall. This is why exiting PCP early is significantly more expensive than waiting for the term to end.
FCA Consumer Duty and PCP
Following the FCA's Consumer Duty regulations (2023), car finance lenders must ensure that PCP deals represent fair value for consumers. The FCA's investigation into discretionary commission arrangements (DCAs) in motor finance has resulted in potential compensation schemes for consumers who were charged inflated rates due to hidden commission structures. If you took out a PCP between 2007 and 2021, you may be eligible to make a complaint.
Optional Purchase Fee
Some PCP agreements include a small optional purchase fee (typically £100–£250) in addition to the GMFV balloon payment. This is not included in the GMFV figure and must be paid separately if you choose to buy the car. Check the total amount payable in your finance agreement to confirm all fees.
Frequently Asked Questions
What is a balloon payment (GMFV) in PCP finance?
The balloon payment, officially the Guaranteed Minimum Future Value (GMFV), is the optional lump sum payable at the end of your PCP agreement if you choose to purchase the car. The lender calculates this at the outset based on predicted depreciation. You are not obligated to pay it — you can return the car instead. The "guaranteed" part means you will never owe more than this amount just to walk away, protecting you if the car depreciates more than expected.
What happens at the end of a PCP agreement?
You have three choices at the end of a PCP agreement. First, hand the car back — walk away with nothing owed, assuming the car is in good condition and within agreed mileage. Second, pay the balloon payment to own the car outright. Third, if the car is worth more than the GMFV, use the equity as a deposit on a new PCP deal. Most UK drivers choose the third option, effectively staying in a rolling PCP cycle every 2–3 years.
What is the mileage allowance on PCP?
Most PCP agreements include 8,000 to 12,000 miles per year. Excess mileage charges are typically 3p to 15p per mile over the limit. Importantly, the mileage allowance also affects your GMFV — a lower mileage agreement means the car is predicted to be worth more at the end, resulting in a higher GMFV and lower monthly payments. Setting your mileage accurately from the start is important for cost management.
Is PCP better than HP or paying cash?
It depends on your priorities. PCP gives the lowest monthly payment and maximum flexibility if you change cars regularly. HP costs more each month but you own the car at the end with no balloon. Cash is cheapest overall (no interest at all) but requires significant upfront capital. If you want to drive new cars every 2–3 years and prefer low monthly payments, PCP is well-suited. If you plan to keep the car long-term, HP or cash is usually cheaper overall.
What is negative equity in PCP?
Negative equity in a PCP deal means your outstanding finance balance is higher than the car's current market value. This happens when the car depreciates faster than anticipated — common with electric vehicles, certain luxury brands, or cars with high mileage. If you are in negative equity and want to exit the deal early, you must pay the settlement figure (which includes all remaining monthly payments and the GMFV minus any interest rebate) minus the car's current trade-in value. This shortfall must come from your own funds or be rolled into a new finance deal.
Can I exit a PCP agreement early?
Yes. Under the Consumer Credit Act, you can voluntarily terminate a PCP agreement once you have repaid 50% of the total amount payable. At that point, you can return the car and walk away. If you have not yet reached 50%, you can still settle early by paying the settlement figure. You can also part-exchange the car at any point — the dealer pays off your finance, and any equity goes towards your next purchase. Be aware that early exit in negative equity will cost extra.
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