How do PCPS work and why are they so popular?

The abbreviation PCP stands for ‘Personal Contract Plan’ and is modelled on the same basis as contract hire for fleets. When you buy a new car, you put down a modest deposit (anything from zero to £2000) and then pay a monthly ‘lease’ fee to the provider – usually a dealer – that covers the depreciation on the car based on its minimum projected future value.

As a result, some cars can be pretty enticing on PCP as if they hold their value well, the rates are often lower. An Audi A4 can work out cheaper than a Ford Mondeo, for example, which goes some way to explaining why traditional saloon cars have fallen by the wayside in recent years.

While £254 is the average UK PCP cost, you can get into a cheaper car for as little as £100 a month, which appeals to those who like the peace of mind of a warranty and having a new car on the drive.

But there’s a catch. At the end of the lease term (three, four or five years) you have to either pay a ‘balloon’ payment to keep the car (essentially its total value), give it back, meaning you’ve made several years of payments and own nothing at the end of it, or move onto another PCP, which is what most customers do (and why dealers love it). There are also penalty charges levied for vehicle damage and excess mileage.