PCP on used cars
We explain the points to consider when choosing a used car personal contract purchase plan
A personal contract purchase plan (PCP) is one of the most popular ways of financing a new car, but what about when buying a pre-owned car?
Many dealers offer PCPs on used cars. While independent dealers typically employ a third-party lender, several franchised main-dealer showrooms sometimes offer PCP finance schemes that come with manufacturer backing. The PCP principle is the same whether you buy new or used – but there are some important differences that are well worth knowing.
Used car PCP – monthly payments
A PCP can lead to appealingly small monthly payments. However, while new cars are often sold on long-term PCPs of up to four years, this isn't always an option when you buy used.
When buying a used car on a PCP, the amount you pay is determined by the cost of the car compared to its value at the end of your payment term. For example, if you choose a three-year (36 month) PCP, you'll pay the cost of the car less its value three years later. At this point, you won't own the car unless you pay a final guaranteed minimum future value (GMFV) payment.
This is determined by the lender and is based on a car's predicted target="_blank">residual value at the end of your payment term. Depending on the age of the car, you may find that longer PCP schemes aren't offered – some lenders have strict upper age limits beyond which a car can't be financed by PCP due to the difficulty in predicting future residual values. This will vary between models, meaning the monthly payment figure may not be as low as you’d hoped.
Used car PCP – incentives
As always with any new or used car purchase, paying the largest initial deposit you can afford will reduce your monthly payments. However, the best financial incentives are typically reserved for new cars and are rarely offered to used buyers.
New cars are often promoted with attractive PCP finance deals designed to increase sales. The terms can include 'deposit contributions' that supplement your initial deposit, low or 0% interest rates, and occasionally deals that don’t require a deposit. However, it's rare for used-car buyers to get offers like these; the majority of used PCP deals require the buyer to come up with a deposit of between 10% to 25%. Additionally, used PCP deals are also likely to have a far higher interest rate, with the APR on some deals hitting double figures.
While car manufacturers have an obvious interest in increasing new car sales, they pay less attention to the number of used cars sold – that's of far more pressing interest to dealer franchise groups. This means used cars rarely benefit from the same promotional budgets as new cars and big purchase incentives are harder to come by.
However, it's worth keeping an eye out for used-car sales events with the offer of a deposit contribution. It's rare to find such an offer in conjunction with a discount, though – dealer profit margins on used cars are often surprisingly slim and further reductions can be tough to negotiate.
Should I buy a used car on PCP?
It's worth remembering that, despite the lower price emblazoned on its windscreen, a nearly new car might not stack up quite so well on a PCP as a brand new model – and it all comes down to the incentives mentioned above.
A three-year PCP on a nearly new car might also be awkward in reality – if the car is several months old when you take possession, it means you will need to get an MoT test before you make your final monthly payment. For some brand-new cars, there are three-year PCP deals that don't require you to complete a first MoT test or pay for a third yearly service before you hand the car back.
The biggest advantage of PCP is that it enables you to drive a new car for a low monthly payment, and this advantage decreases with the age of the car. You may find that the lack of promotional incentives and subsidised interest rates mean a PCP on a car that's a few years old actually works out only a little less per month than a brand-new car. The difference may come with the size of the GMFV payment, which will be markedly lower. However, many buyers choose not to make this payment and trade in for another new car instead.
If you plan to change your car regularly and will never make that final GMFV payment, a PCP might suit. However, if your intent is to own the car outright, it might make sense to pay for the car via a hire purchase agreement. This involves the whole cost of the car being broken into monthly instalments, plus any costs, less your initial deposit. Although dealer incentives on HP are hard to come by, some lenders offer low rates of interest – although it's worth comparing this to the cost of a loan from your bank or building society.
And when the time comes to agree a deal, you can find a little extra help from our guide to agreeing a great price.
Read our guide on how to budget for a new car