Personal Contract Purchase (PCP) is similar to a Hire Purchase agreement as you will usually pay an initial deposit, followed by monthly instalments.
What's different with PCP, is that your monthly instalments are only paying off the depreciation of the car, rather than the entire value of the car.
How does PCP actually work?
At the start of your PCP contract, a Guaranteed Future Value (GFV) of the car is estimated. This is the car's expected value when your contract ends.
For you, this simply means that the money you're actually borrowing and repaying is the difference between what the car is worth now, and what it will be worth at the end of your contract (the depreciation). You'll pay this difference off in monthly instalments.
This means lower monthly payments for you, but you will need to pay a final payment at the end (the Guaranteed Future Value) if you want to buy the car.
Once your monthly payments are finished, you'll have three options:
1. Buy the car by paying the final balloon payment (the Guaranteed Future Value)
2. Hand the car back - your finance company has already predicted the Guaranteed Future Value of the car, so handing the car back will settle the deal.
3. Part exchange for a new car
Monthly payments on a car financed by PCP usually lower than if your car is financed by a Hire Purchase agreement.
If you decide not to buy the car, you can simply walk away when you've made all the monthly payments.
If your car is worth more than the Guaranteed Future Value then you can use that equity towards a deposit on a new car.
Things to bear in mind
If you want to buy the car you will need to pay your final balloon payment (the Guaranteed Future Value)
You will need to agree on an approximate mileage estimate at the beginning of your contract.