PCP is cheapest per month because you are not buying the car
On a personal contract purchase you do not finance the price of the car. You finance the depreciation: the gap between what it costs today and its guaranteed minimum future value at the end of the term, which everybody calls the balloon.
So a much smaller amount is being repaid, the monthly figure is correspondingly lower, and at the end of the term you own nothing at all unless you pay the balloon. That is not a trap buried in the small print. It is the entire product, and it can be exactly the right product.
What is misleading is the comparison. A calculator that puts three monthly figures side by side is putting renting next to buying and inviting you to pick the smaller number.
The honest comparison is the cost to own
Deposit, plus every payment, plus the balloon where there is one. That is what it costs to end up owning the car under each route, and it is the only figure where the three products are measuring the same outcome.
There is a second effect hiding in the PCP total: interest runs on the balloon for the whole term even though none of it is repaid until the end. That is why a PCP that looks cheapest monthly can finish worst on total cost, and why the two figures can point in opposite directions.
The tool also shows the walk-away total separately, because handing the car back is a legitimate choice rather than a failure. If you were always going to change the car, paying for the depreciation and returning it is coherent. It only goes wrong when somebody believed they were buying.
The mileage limit is a real cost, not a formality
The guaranteed future value is only guaranteed if the car comes back within its agreed mileage and in reasonable condition. Excess mileage is charged per mile, across the whole term, and it is collected at the end when you have least appetite for it.
Four thousand miles a year over a four year deal at 10p a mile is £1,600, which on most agreements is several months of payments. An optimistic mileage figure at signing costs real money later, and the temptation to understate it is strong because a lower allowance means a lower monthly payment.
Ownership differs as much as cost
- Personal loan: you own the car from day one and the debt is unsecured. It is yours to sell at any time, and the lender has no claim on the vehicle.
- Hire purchase: you do not own it until the final payment. The agreement is secured on the car and you cannot sell it until it is settled.
- PCP: the same, and at the end you have a decision to make rather than a car.
If your circumstances change, that distinction usually matters far more than a point or two on the rate. A secured agreement can be repossessed considerably more readily than an unsecured loan can be enforced.
The escape route nobody mentions
Both PCP and hire purchase carry a statutory right to voluntary termination once you have paid half the total amount payable. You hand the car back and the agreement ends.
Note that it is half the total, not half the term, and on most agreements those are not the same point: the halfway point in money usually arrives later than the halfway point in time. It is a genuine protection and it is very rarely raised at the point of sale.
Common questions
Why is the PCP monthly payment so much lower?
Because you are not buying the car. PCP finances the depreciation, meaning the gap between the price today and the guaranteed minimum future value at the end, which is the balloon. A smaller amount is being repaid, so the monthly figure is lower, and at the end you own nothing unless you pay the balloon. That is the product rather than a catch in the small print.
How should I compare the three options?
On the total cost to end up owning the car, balloon included. Comparing monthly payments puts renting next to buying and calls them the same thing. The tool shows deposit plus all payments plus, on PCP, the balloon, so the three figures are actually measuring the same outcome.
Is handing the PCP car back a bad outcome?
Not necessarily, and that should be said plainly. If you were always going to change the car anyway, paying for the depreciation and walking away is a coherent decision. It is only a bad outcome when somebody believed they were buying the car and discovers at the end that they were not. The tool shows the walk-away total separately for exactly that reason.
How much can excess mileage cost?
More than people expect, because it is charged per mile and applies to the whole term. Four thousand miles a year over a four year deal at 10p a mile is £1,600, due when you hand the car back. The guaranteed future value is only guaranteed if the car returns within its mileage and in reasonable condition, so an optimistic mileage estimate at signing is an expensive one.
Who owns the car under each option?
On a personal loan you own it from day one and the debt is unsecured, so it is yours to sell whenever you like. On hire purchase and PCP you do not own it until the final payment, the agreement is secured against the car, and the lender can repossess more readily. If your circumstances change, that difference usually matters more than the rate does.
Can I get out of a car finance agreement early?
Both PCP and HP carry a right to voluntary termination once you have paid half the total amount payable. That is half the total, not half the term, and the two are not the same point. It is a genuine escape route and it is very often not mentioned at the point of sale.