PCP (Personal Contract Purchase) finance lends you the car while you pay off the value of its depreciation over the term of your agreement. A personal loan provides you with the money to buy the car outright and then pay off the loan, so you immediately become the owner of the car.

Want to find out about all the differences between PCP car finance and a personal loan? Read on to see which option best suits you for your next car purchase.

What is PCP car finance?

PCP car finance may seem like a complicated process at first sight, but it's actually quite simple. When purchasing a car through a PCP agreement, you will face three main payments:

  • Deposit
  • Monthly payments
  • Balloon payment (optional)

The deposit is simple. As with other big purchases, you will be required to put down a deposit, usually around 10% of the car's value. In most cases you can choose to put more down as an initial deposit if you'd like. This will make your monthly payments cheaper as it goes against the total amount you loan.

A balloon payment, also known as a Guaranteed Minimum Future Value (GMFV), is one final payment you make to the finance provider if you wish to keep your car after your agreement. This will be pre-agreed before your finance deal begins and is what the provider predicts your car will be worth after your term.

The loan amount you pay for the car is the vehicle's current value minus the GMFV and deposit. This means that you are essentially paying to cover the value of depreciation on the car, as once you come to the end of the deal you either hand the car back or pay the current value of it.

Once your agreement has ended, you can either pay the balloon payment and keep the car, hand the car back and start a new PCP finance deal, or simply hand the car back and walk away.

What is a personal loan?

A personal loan is a standard loan that you can get from the bank or finance provider, in this case to cover the cost of your car. You borrow the money from the bank themselves and then use that money to buy the car outright. So you essentially become a cash buyer, owning the car yourself and making the monthly payments to the loan provider.

Personal loans will come in one of two forms, secured or unsecured. A secured loan means that your loan is secured against one of your assets, most commonly your house. This acts as a guarantee for the loan. It is important to understand this because it could mean your house is repossessed if you fail to keep up with your monthly payments.

Unsecured loans are loans that are not secured against an asset. This may seem like a no-brainer as it gives the provider no right to repossess the asset if you fail to make the repayments. However because of the lack of guarantee, these loans will likely include a larger interest rate.

What is the difference between PCP and a personal loan?

Despite having many differences between them, PCP car finance and personal loans are, at their core, not very dissimilar at all. You lend money from a provider to purchase a new car, and over the course of your agreement you make monthly payments to cover the loan.

The main differences lie in the beginning and end of the agreement. If you opt for the PCP method, you will pay a deposit, and arrange a balloon payment, that you may or may not pay. Alternatively, with a personal loan you simply loan the amount you need to buy the car. No deposit, no balloon payment, just the amount you need to own the car, and then pay back the full value, plus interest to the bank.

There are some smaller differences with regards to restrictions on the car or flexibility. We'll talk about these later on in more detail.

PCP or personal loan: which is the best option for me?

So which method is right for you, PCP car financing or a personal loan? It will likely depend on a number of factors including your budget, how you use the car and what you intend to do with it after your agreement.

We have broken down the specifics to give you a clearer idea of what you can expect with both methods.

Payment structure

As we briefly mentioned, a PCP car finance agreement consists of three main payments. So take a £20,000 Mini Hatchback for example.

You opt for a three year PCP deal, and pay a £2,000 deposit. Before you drive away in your brand-new Mini, the finance provider has predicted that the car will be worth £8,000 after the three year agreement. Therefore you are only loaning £10,000 as you might choose to pay the £8,000 after the agreement, or hand the car back.

The £10,000, plus interest, is then split equally over the next 36 months to cover the cost of the loan.

Below is a visualisation of how PCP payments are structured.

Pie chart showing breakdown of PCP costs

Now, take the same £20,000 Mini Hatchback, but this time you opt for a personal bank loan to finance the car.

You go to the bank and ask for a loan of £20,000 to cover the cost of your new car. After credit checks and other legal requirements, the bank agrees to loan you the money - and you agree to repay the loan over three years. So you take the £20,000 they have loaned you and give it all to the dealer in return for the brand-new Mini Hatchback. You now own the Mini and owe the bank £20,000, plus interest, which you will pay back in monthly payments.

Ownership

The ownership structure of the two methods are very different. When you use PCP car finance, you do not own the vehicle until you pay the balloon payment at the end of the deal. So throughout your loan agreement the finance provider owns the car.

This isn't the case with a personal loan. You use the money borrowed from the bank to buy the car outright. So you are the owner of the vehicle, until you decide to sell or scrap it.

Insurance

Under both PCP and personal loan agreements you will be required to insure the car yourself. With a personal loan this is always the case. They are only loaning you money to buy the car, and as with any car purchase it is your responsibility to insure the vehicle.

PCP car finance deals are almost exactly the same, except it is worth checking with the providers beforehand as in some rare cases the insurance will come included. These are very rare however, and most dealers will require you to take out fully comprehensive cover to insure the car. This is to protect the car as you'll be hiring it until you pay the balloon payment at the end.

It is also your responsibility to take out GAP (Guaranteed Asset Protection) insurance should you wish to. GAP insurance covers you if your car is written off or stolen while you owe more to the lender than the car is currently worth. As most insurance companies only pay out the value of the car, you may find yourself having to cover the difference out of your own pocket.

Maintenance

Because you might hand the car back at the end of your PCP agreement, you are required to maintain the car. You can do this using one of the provider's approved garages. Using a garage that is not approved by your lender will likely invalidate the GMFV and could see you having to pay more if you wanted to keep the car.

As you are the owner of the car when you use a personal loan to finance your car, it is your responsibility to keep the car appropriately maintained. You do however have more flexibility when it comes to garages. The car is yours, so you can have your car serviced or maintained wherever you see fit.

Flexibility

Both options offer a reasonable amount of flexibility when you finally pay off the loan.

As the owner of the car, you are free to do as you wish with the car when you use a personal loan to finance the car (even during the loan period, as long as you continue to pay the loan off).

If you opt for a PCP car finance deal, you don't have that same flexibility during the agreement as it is not your car. However, once you have finished paying off the loan, you have three options:

  • Pay the balloon payment and own the car outright
  • Use any equity you may have towards a new PCP deal on a different car
  • Hand the car back and walk away

PCP deals are much more restrictive when it comes to mileage as well. The GMFV of the car is based upon a few factors, including the miles you expect to do during the term. So it is your responsibility to stick to that mileage agreement or else you risk facing excess charges if you return the car after your agreement.

Again, because the car is yours if you opt for a personal loan, you are free to drive as many miles as you wish.

Early termination

You can terminate a PCP deal early. Under the Consumer Credit Act 1974, voluntary termination is possible if you have paid at least 50% of the total value of the loan. Simply hand the car back and walk away. Crucially, the total value of the loan includes the balloon payment, interest, and others fees.

A personal loan is not quite as simple. You can terminate the loan but that can only be done by paying off its value. You can't just hand the car back and walk away, you would have to sell the car, and use the proceeds towards paying off the loan.

Is PCP car finance right for me?

So how do you tell which option is the right one for you? Our quick summary will help you decide.

A PCP car finance agreement suits someone who:

  • Is unsure if they want to keep the car after the agreement
  • Wants to pay an initial deposit to make the monthly payments smaller
  • Prefers to regularly change cars
  • Doesn't want to have to worry about depreciation

Is a personal loan right for me?

A personal loan will be better suited to someone who:

  • Wants to own a car outright
  • Doesn't want to be restricted by mileage and maintenance agreements
  • May want to sell the car at any point during the term
  • Is comfortable paying larger monthly payments in order to own the car

Other available finance options

PCP and personal loans are not the only finance options available. Hire Purchase (HP) is another common method of financing, as is Personal Contract Hire (PCH), or car leasing, as it is more commonly known. Find out more about the differences between HP and PCP in our other guide. Or if you want to know more about leasing, read through our leasing guides.