Before You Buy a Car on Finance: PCP Costs, the FCA Review and What Dealers Don't Tell You

How PCP finance works and what it actually costs

Personal Contract Purchase is the most common form of car finance in the UK, accounting for the majority of new car sales. Under PCP, the buyer pays a deposit, makes monthly payments for a fixed term (typically two to four years), and then has three options at the end: return the car, pay a final balloon payment to own it outright, or part-exchange into a new PCP deal.

The monthly payment under PCP is lower than under hire purchase because it only covers the depreciation of the car during the finance period, not the full value. The balloon payment — the Guaranteed Minimum Future Value set by the finance company — represents the estimated residual value at the end of the term. This structure makes PCP monthly payments appear affordable while obscuring the true total cost.

On a £25,000 car with a £3,000 deposit, a four-year PCP at eight percent APR with a £10,000 balloon payment might show monthly payments of around £370. The total amount repayable is approximately £27,760 — more than the cash price. If you exercise the option to buy at the end, the total cost rises further to £37,760. Comparing the representative APR across different finance offers is essential, but the total amount repayable is the single most important figure.

The FCA car finance review and what it means for buyers

In January 2024, the FCA launched a review into historical motor finance commission arrangements following a Court of Appeal ruling that found lenders and brokers had unlawfully received commissions without properly disclosing them to customers. The review covers discretionary commission arrangements (DCAs) — where car dealers were paid higher commissions by lenders in exchange for charging customers higher interest rates — which were common before the FCA banned them in January 2021.

The FCA has indicated that a significant number of customers may have paid more for their car finance than they should have, and that a redress scheme may be established. Customers who took out car finance before January 2021 may be entitled to compensation. The FCA announced a pause on complaint handling timelines while it investigates the scale of the issue. Check fca.org.uk for the current status of the review and any redress scheme announced.

Hire purchase versus PCP — which costs more

Hire purchase is simpler than PCP. The buyer pays a deposit and makes monthly payments covering the full cost of the car plus interest over the agreed term. At the end of the term, ownership transfers automatically with no balloon payment decision required. Monthly payments are higher than PCP because the full value is being paid off, but there is no residual uncertainty and the total cost is typically lower than PCP where the balloon is exercised.

HP is more suitable for buyers who intend to keep the car long term. PCP is more suitable for buyers who want to change car every two to four years and are happy not to own the vehicle outright. The critical difference is that under PCP you do not own the car during the finance period and the finance company can repossess it if payments are missed, even if only a small amount remains outstanding.

The true total cost of car ownership

Finance is only one component of the total cost of running a car. Insurance for a new driver or a high-value vehicle can exceed £2,000 per year. Road tax (Vehicle Excise Duty) ranges from zero for some electric vehicles to several hundred pounds annually for high-emission vehicles. Fuel or electricity costs, servicing (new cars typically require a service every 12 months or 10,000 miles), tyres, MOT from year three, and breakdown cover all add to the annual running cost.

A car costing £300 per month on finance can easily cost £700 to £1,000 per month in total when all running costs are included. The affordability of the monthly finance payment is not the same as the affordability of car ownership. Calculate the total monthly cost including insurance, fuel and servicing before committing to a finance agreement.

GAP insurance and add-on products at dealerships

GAP insurance covers the difference between what your motor insurer pays out if a car is written off and the amount outstanding on your finance agreement. It is a legitimate product that serves a real purpose — new cars depreciate rapidly and in the event of a write-off in the first two years, the insurer's settlement may be significantly less than the outstanding finance balance.

However, GAP insurance sold at dealerships has been the subject of significant FCA concern about value and commission arrangements. Standalone GAP insurance from independent providers is typically 50 to 70 percent cheaper than dealer-sold GAP products for equivalent coverage. If you are offered GAP insurance at a dealership, note the price and compare against independent providers before accepting. The FCA has issued guidance to insurers about the value of GAP products following a market review in 2024.

What to check before signing a finance agreement

Check the total amount repayable — this is the figure that matters, not the monthly payment. Check the APR and compare it against personal loan rates for the same amount — a personal loan may be cheaper than dealer finance. Check the mileage limit on PCP agreements and understand the excess mileage charge, which can be significant. Check what happens if you miss a payment. Check whether the finance is regulated by the FCA — regulated agreements have specific consumer protections including a 14-day cooling off period.

Frequently asked questions

What is PCP finance and how does it differ from HP?

PCP (Personal Contract Purchase) involves monthly payments covering only the car's depreciation over the term, with a large balloon payment at the end if you want to own it. HP (Hire Purchase) involves monthly payments covering the full cost, with ownership transferring automatically at the end. PCP monthly payments are lower but the total cost can be higher if you buy the car at the end.

Am I affected by the FCA car finance mis-selling review?

If you took out car finance before January 2021 and the dealer received a discretionary commission from the lender, you may be entitled to compensation. The FCA is investigating the scale of the issue. Check fca.org.uk for current guidance and any redress scheme. You can raise a complaint with the lender now and the complaint will be held pending the FCA's determination.

Can I cancel a car finance agreement?

You have a 14-day cooling off period after signing a regulated finance agreement during which you can withdraw. After 14 days, early settlement is possible but may incur charges. Under PCP, you can voluntarily terminate the agreement once you have paid 50 percent of the total amount payable, returning the car with no further liability beyond any excess mileage or damage charges.

Is dealer finance always more expensive than a personal loan?

Not always, but often. Manufacturer finance deals sometimes offer very low APRs (including zero percent) on specific models to drive sales. These deals are worth comparing against personal loans but check whether the zero percent deal requires buying a more expensive trim level or reduces negotiating room on the price.

What happens if I miss a car finance payment?

Missing a payment is recorded on your credit file and can affect future credit applications. The lender will typically contact you to arrange repayment. If payments continue to be missed, the lender can apply to repossess the vehicle. Under HP and PCP, if you have paid less than one third of the total finance amount, the lender can repossess without a court order.