How to get the lowest monthly payments with used car PCP finance

Looking for the cheapest monthly payments on your next set of wheels? Used car PCP finance could be your best bet

John Evans
Aug 6, 2019

Personal contract purchase finance (PCP) makes your money go further than a traditional car loan, as your monthly payments only cover a portion of the car's cash price - helping you to step into a newer, more desirable model. This is equally true with used cars, where you can benefit from even more affordable instalments than with new cars, making it a quick way to slash your monthly car bills.

With PCP you pay an initial deposit - typically 10% of the cost of the car, though smaller and larger deposits are normally possible - followed by a series of monthly payments that cover the difference between the car's price new and what it's expected to be worth at the end of the contract.

When the contract comes to an end, you can either pay off the remaining balance - known as the optional final payment - and own the car outright. Or you can effectively trade it in for a new finance deal, putting any equity - should the car be worth more than the remaining balance at this stage - towards a new deposit. Or, assuming you have stuck to the preagreed mileage limit and the car is in good condition, you can hand the car back walk away with nothing let to pay.

Used car PCP finance deals

PCP finance was initially only available on new cars, but is now widely available on used models and works in a similar way.

The big difference though, is that a used car will not lose anywhere near as much value as a new car - since cars lose value fastest when brand new, slowing as they get older, and so your monthly payments should be dramatically lower. As a result, you can typically get much more for your money with used car PCP finance.

Keep reading to find out how to maximise what you get for your monthly budget.

Why is used car PCP cheaper than new car PCP?

A brand new car can lose up to 40% of its value within its first year on the road. After three years many cars have lost around 60% of their value. It's that difference in value that you pay for with PCP finance monthly payments, so a three-year contract on a new car could see you paying well over half of the car's price. Choose a £20,000 car and that'd mean you can expect your monthly payments to amount to £12,000 plus interest.

If you financed that one-year old car that had lost 40% of its value instead - taking the cash price down from £20,000 to £12,000 - you can expect the used car finance deal to cost far less per month, as a huge chunk of the car's initial value has already been lost. Finance a three-year old car that's lost 60% of it's value, meanwhile, and you're only financing £8,000 plus interest so your monthly payments will be far smaller than going for a new car.

Another bonus of used car finance is that the deposit is generally much lower - as these are typically set as a proportion of the car's price at the start of the contract - and the optional final payment needed to buy the car outright is much less, too.

If you're sure you want to own the car outright and want to pay less overall, rather than having the lowest monthly payments, however, hire purchase could make more sense. Keep reading to understand how PCP finance offers lower monthly payments, but hire purchase should cost you less overall if you want to own the car.

Why are PCP finance monthly payments lower than hire purchase ones?

The difference is that with hire purchase your monthly payments pay off the whole cost of the car, while with PCP you don't own the car once you've made all the monthly payments; at this stage you have to make the substantial optional final payment if you want to take ownership. Otherwise you have to hand it back.

What this means is that hire purchase instalments are large and once you've made your last monthly payment the car is automatically yours. With PCP, however, the monthly payments are low, but you have to make a large optional final payment to buy it. As a result, the more the car is expected to be worth at the end of the contract - the lower your monthly payments, but the more you have to pay if you care about owning it. 

Before PCPs came along, hire purchase and traditional car loans were used widely to help drivers buy used cars. With car loans drivers own the vehicle from day one, while with hire purchase, it's yours once you've made the last payment. Those looking to own the car should pay less interest with hire purchase than PCP, as the debt is being repaid quicker.

Since more and more drivers, however, are focused on getting the best car for the lowest monthly payment, PCP finance has rocketed in popularity. If you're not concerned about owning the car outright or would rather prioritise affordable instalments over an affordable final payment to buy the car, then PCP is for you.

Another bonus with PCP comes in not having to worry about the future value of the car (provided you stick to the preagreed mileage limit and keep the car in good condition). Even if your car plummeted in value unexpectedly, the finance company takes the risk. If you'd bought the same car through hire purchase and planned to sell it at the end of the contract, you could get back less for this at this stage than expected, in contrast.

Not sure whether hire purchase or PCP finance is best for you? Read our guide to hire purchase vs PCP finance.

PCP: why are some cars cheaper than others?

It’s all to do with the optional final payment. The higher it is, the smaller the difference between this and the car’s purchase price, meaning the lower your monthly payments - as instalments are calculated to cover the difference between the initial price of the car and its expected value at the end of the contract.

Cars with strong residual values that are in demand second-hand often cost less per month than you might expect, as the high initial price can be outweighed by the very high predicted value when the contract is over. Meanwhile, undesirable models that lose value quickly may not be as good value as you expect, as they may cost less to begin with but could lose most of this value over the contract.

Cars such as the Audi A5 Coupe (above) are known for having very strong values second-hand, especially compared with less popular models such as Toyota Verso compact people carrier (below). This can be seen in how an £18,995 2017 Audi could cost £225 per month on PCP finance compared with a £18,995 2016 Toyota for £329 per month (with identical contract terms).

As these cars have identical cash prices, it's the residual values that make all the difference; while the Audi is expected to drop to just over £11,000 in value after four years, the Toyota is predicted to be worth less than £5,000 at this stage. Consequently, monthly payments for the Audi cover the difference between the £18,995 initial price and the £11,001 optional final payment - a difference of £7,994. Meanwhile, monthly payments for the Toyota are higher as they cover the difference between £18,995 and the low £4,974 predicted final value - a gulf of £14,021

Therefore, it's always worth getting a few quotes for different models to see whether you could get the car you really want for less than another model that would simply do the job.

Why not just increase the optional final payment?

Because to do so would mean they’d have to subsidise the car’s future value, the figure that the optional final payment is based on. Do this and at the end of the agreement the finance company would be left with a car that is worth less than it owes them and would soon go out of business or have to pass the higher cost on to the borrower in another way.

A number of manufacturers are very cautious when working out the optional final payment; this means they work out what they believe the car will be worth at the end of the contract and then set the actual payment as a lower amount, just in case.

What this means is that monthly payments are a little higher than they could be, but the driver should have equity at the end of the contract. As drivers can put any equity in their current car towards their next finance deposit, this can help some drivers to find enough deposit to get the car they want for a monthly payment they can afford next time around. Be aware, though, that equity is not free money - you've just paid a little extra each month so you might get something back when you come to swap cars.

Other manufacturers, however, don't build in this safety net, so you may not end up with any equity at all. As a result, it's important to shop around and compare prices, so that you can find a car that suits your needs that you can afford.

Optional final payments: why are some so high?

It’s because cars lose value at different rates. In simple terms, a model with a strong image, whose price isn't discounted much from new or which is likely to be in demand for a longer period of time is likely to depreciate less quickly than a less popular model. As a result, the finance company feels confident enough to use a larger optional final payment on this type of model.

This can provide the pleasant surprise that some used cars such as certain Audis, BMWs and Volkswagens, for example, can be no more expensive to finance on a PCP than those from less desirable brands, even if they have a higher cash price.

High optional final payments: what are the risks?

Because a high optional final payment usually goes hand in hand with an upmarket car of some description, it’s likely this type of car may cost more in the first place, meaning that the amount you have to finance could be the same as a car that loses money faster but has a lower cash price. Still, at least you’d get a better car for the same monthly payment.

If it’s an inflated amount that doesn't reflect the car’s future value, you may find yourself at the end of the term with less equity than expected or even none at all, to put towards your next finance deal. You won't be out of pocket with PCP finance, but you may also have nothing to show for all the payments you've made.

If you want to make the optional final payment and buy the car at the end of the term, you may find that it is simply to expensive for you to do so. Yes, you can refinance this amount, so that eventually you do own the car, but considering you'll have already paid interest on this lump sum over the initial contract term, you'll have to pay another set of interest if you take out another loan. As a result, if you know you want to own the car at the end of the contract, hire purchase can be a wiser choice, as though you'll pay more each month, you'll pay less overall, as interest is building up more slowly.

Five tips for the lowest monthly payments with used car PCP finance

  1. Choose a used car with a low purchase price but a high optional final payment. Search through BuyaCar and order the cars that pop up by lowest monthly payment to see which models stand out.
  2. Where possible, pay a larger deposit to reduce the amount you have to borrow. The less you borrow, the lower your monthly payments will be.
  3. Opt for a lower annual mileage limit, as doing this means the car you hand back should be worth more, shrinking your monthly payments. Make sure this is realistic, as declaring a lower figure than you actually cover could result in excess mileage charges at the end of the contract.
  4. Shop around for a lower interest rate (interest is charged on the whole amount and not just the difference between the initial price and predicted final value). Focus on improving your credit score to give yourself the best chance of being approved for finance and getting a good interest rate.
  5. Consider extending the loan term but bear in mind you will pay more interest overall and that a longer contract increases the chance that your circumstances may change and the car may no longer be suitable.

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