If you want to change your car often but want also lower monthly payments, personal contract purchase (PCP) could be the answer. It’s a flexible deal which often comes with some useful options. Here’s some helpful basic information to help you to work out if personal contract purchase is the right car finance arrangement for you.

PCP is basically a loan to help you buy your car, however unlike a regular loan, you won’t be paying off the full value of the car and you won’t own it at the end of the deal (unless you choose to) and comes in three basic parts:

Deposit

Dealers offering PCP finance will typically want around 10% of the car as a deposit. Some car manufacturers’ finance arms offer valuable ‘deposit contributions’ of £500-£2,000 or more if you’re buying a new car but only if you take their finance – eg, VW Finance offers £1,000. The larger the deposit, the less you’ll have to borrow.

Borrowing amount

The amount you’ll have to borrow is based on how much the finance company predicts the car will lose in value over the term of the deal (usually 24 or 36 months) minus the deposit you’ve put down. You’ll pay this amount off during the deal, plus interest. So you’re not paying off the full value of the car. Typical APRs are 4%-7%.

Balloon payment

The balloon payment is a balancing payment you pay IF you want to own the car. Also often referred to as the Guaranteed Minimum Future Value (GMFV), this is how much the dealer expects your car to be worth after your finance deal ends. It’s agreed at the start of your deal. You don’t have to pay this, as you get a choice of what to do at the end of the deal. But it is the sum you’ll pay if you want to keep the car.