In Technical Annex 2: State of Competition in the Motor Finance Market, published by the Financial Conduct Authority (FCA) alongside its car finance redress scheme proposals on 7 October 2025, the regulator notes that personal contract purchase (PCP) finance is the most popular type of motor finance arrangement for new vehicles.

Finance & Leasing Association (FLA) data supports this, highlighting that motor finance arranged at the point of sale (i.e. at the dealership) accounted for over 80% of private new car sales in 2024.

Although the structural features of PCP have not been the direct focus of the regulator’s investigation or the development of its redress proposals, they do help to explain why so many consumers entered into complex products in which lenders could charge hidden and excessive commissions.

PCP has long been marketed to motorists as a modern, flexible way to drive a newer, more expensive car while maintaining a seemingly affordable monthly payment. For many consumers, their PCP agreement has achieved precisely that. However, the structure that makes PCPs so attractive may also introduce hidden flaws and significant risks, many of which may not have been explained adequately at the point of sale.

What is PCP?

PCP is a type of hire purchase (HP) agreement. In contrast to a traditional HP arrangement, rather than repaying the full cost of the car over the term of the agreement, the finance provider estimates what the vehicle will be worth at the end of the term and defers that figure into a larger final sum, the Guaranteed Minimum Future Value (GMFV) or ‘balloon payment.’

If you take out a PCP agreement, you will usually:

• pay a deposit, which is often 10 – 30% of the vehicle’s price, although dealers typically incentivise buyers with no or low deposit offers or ‘dealer deposit contribution’ offers; and
• make fixed monthly payments, which are intended to cover the car’s estimated depreciation over the term, plus interest.

At the end of the term, you then have a choice between:

• making the balloon payment and taking outright ownership of the vehicle;
• handing the car back, paying any contractual penalties related to mileage and the condition of the vehicle; or

• using any ‘equity’ in the vehicle—generally the value of the car above the GMFV—as a deposit towards a new PCP agreement.

Why has PCP become so popular?

Several factors have driven the growth and popularity of PCP:

• Lower monthly payments than HP for the same vehicle, because part of the cost is deferred into the balloon payment.
• Access to newer and more expensive vehicles, sometimes for individuals and households that would have struggled to buy a car outright or fund a traditional loan.
• Marketing that emphasised ‘flexibility’ and the opportunity to ‘upgrade’ regularly, framing PCP as similar to a smartphone contract rather than a long-term credit commitment with several potential variables.

These factors are all positive, but the multi-part structure of PCP agreements often makes it difficult for consumers to calculate the total cost of credit, what they are actually paying for the vehicle, or to identify where their interest rate may have been inflated to incorporate a hidden commission payment.

Today, PCP has become closely associated with the UK’s car finance mis-selling scandal, with the FCA estimating that 14.2 million car finance agreements—including, but not exclusively, PCP arrangements—were mis-sold between 6 April 2007 and 1 November 2024.

These structural features of PCP, combined with the way the product has been marketed, have helped drive its popularity and bring large numbers of consumers into complex arrangements in which mis-selling could occur at scale.

Genuine advantages of PCP agreements

Lower monthly payments

As you are financing only the expected depreciation and interest on your borrowing, rather than the full price of the vehicle, your monthly payments are usually lower than they would be under a hire purchase agreement for the same car. Using a car finance calculator on a dealer’s website will often demonstrate this clearly.

Multiple end-of-term options

The opportunity to hand the car back, pay the balloon payment and own the vehicle outright, or 'part-exchange' the car and move into another PCP agreement, gives you options around what you wish to do.

However, in practice, many agreements do not reach full term, as your dealership is likely to contact you to 'upgrade' sooner, selling it to you as a benefit while securing a valuable used car for their inventory, which they would then almost certainly look to sell via an HP arrangement.

Some protection against steep falls in value

The GMFV offers you some protection if your vehicle's real-world value at the end of the term is lower than the figure quoted when you entered into the agreement. You will usually be able to walk away by returning the car, subject to any contractual obligations or 'penalty' payments you may have to pay due to the vehicle's mileage and condition.

Predictable budgeting

Fixed monthly payments, a defined term, and knowing what you will need to pay if you make your balloon payment may help you plan your household budget and transportation costs more effectively.

The problem with PCP is not that these benefits are illusory, but that they are often presented without equal emphasis on the potential drawbacks, leaving people in an environment in which mis-selling through the addition of undisclosed and excessive commissions can occur.

PCP flaw #1: PCP agreements are structured to discourage balloon payments

The GMFV lies at the heart of your PCP agreement and will be estimated by the lender based on several factors, including the make and model of the vehicle, the term length, and the mileage you say you will do over the course of the term.

Your monthly repayment is calculated broadly as:

(Cash price of the car – GMFV – your deposit) + interest, spread over the term = your monthly payment

A higher GMFV relative to the car's cash price means the lender expects the vehicle to retain more of its value. That, in turn, means that:

• the amount you need to ‘finance’ over the term is smaller; and
• your monthly payments are lower.

This creates a clear commercial incentive for lenders to set optimistic residual values. As well as making PCP agreements appear cheaper, from the lender's and car dealer's perspectives, a higher GMFV helps support three- and four-year resale values, as the finance model depends on those values being achieved.

Why does this discourage balloon payments?

When you enter into a PCP agreement, the three options you will have at the end of the term are often presented with equal weight.

In practice, a high GMFV discourages you from ever making the balloon payment:

• The balloon payment is often a substantial lump sum. For many households, saving the required amount over three or four years while making monthly payments, or dedicating a chunk of their savings to own the vehicle outright, is unrealistic, particularly during periods of broader economic pressures.
• The GMFV can be close to, or even exceed, the car's real market value. Where a GMFV has been set ambitiously, it will often make little economic sense to pay the balloon at all, because you could buy the same car for a similar or lower price on the open market.
• Dealers encourage you to make 'rolling upgrades.' It is common—particularly when resale values are high—for dealers to contact you long before the end of your term, inviting you to ‘part-exchange’ and start a new PCP agreement. Any equity you have built up is used as a deposit, and negative equity may be rolled up into the new deal.

Ultimately, the outcome is that PCP often functions less as a route to vehicle ownership and more as a mechanism for dealers and lenders to keep you in a permanent cycle of monthly payments. While the high GMFV helps car dealers manage used vehicle supply and pricing, it may leave you always paying for cars you may never own.

PCP flaw #2: Mileage commitments and expensive small print

Your mileage commitment is central to how your PCP agreement is priced; however, it is easy to underestimate or misunderstand its impact.

How your mileage commitment affects your monthly payment

When you enter into a PCP agreement, you agree (usually by estimating) an annual mileage commitment, which is used to calculate your total mileage allowance over the term. For example, if you drive 10,000 miles a year and enter into a four-year PCP agreement, your total allowance will be 40,000 miles.

The higher the mileage:

• the lower your car’s predicted value at the end of the term; and
• the higher your monthly payments, because the agreement assumes greater depreciation.

Conversely, selecting a lower mileage allowance will usually reduce your monthly payment, because the lender assumes the car will be worth more at the end of the term.

How overestimating your mileage quietly inflates your monthly cost

Some car dealers encourage their customers to choose an unrealistically high mileage limit ‘to be safe’. While that may appear prudent on the surface, in reality, it may mean that:

• you pay for depreciation that does not actually occur; and
• your monthly payment is higher than necessary for how you actually use the car.

For example, if you regularly drive 7,000 miles per year but enter into a PCP agreement on the basis that you drive 12,000 miles per year to avoid the risk of excess charges, you are effectively paying every month for a benefit you never use. Over the course of your term, that additional cost can be significant.

But underestimating your mileage can carry a hidden cost

The opposite problem arises if your car dealer steers you towards committing to a lower mileage limit to make the monthly payment appear more affordable. In some cases, your dealer may have even set the limit without asking you.

If you exceed your total mileage allowance and hand the vehicle back at the end of the term, you will usually have to pay an excess mileage charge, calculated in pence per mile. According to Carlingo, these charges can range anywhere from 7.2p to 25p per mile, often plus VAT.

To illustrate, if:

• your four-year agreement allows 40,000 miles;
• you return the car having driven 45,000 miles; and
• your excess mileage rate is 10p per mile (excluding VAT);

you could face a bill of £500 plus VAT for the mileage alone.

Many consumers only discover the real cost of their mileage decision when they have the car back and later receive an invoice, sometimes alongside charges for damage that is said to fall outside its ‘fair wear and tear’ parameters.

The real problem with mileage commitments

You typically enter into a PCP agreement for three or four years. However, there is usually no provision for what happens if life changes during that time. For example, you could move house, change jobs and face a longer commute, become a carer for a loved one, or have other changes in your family circumstances.

A rigid mileage structure and having to commit upfront can leave you trapped between paying more than necessary and risking a substantial bill at the end.

And whilst there is a relationship between mileage and the value of a second hand car, the effect on the residual value is not necessarily that which is assumed by the contract: you end up paying a penalty.

Other flaws with PCP agreements

While the GMFV and mileage commitments are the most significant factors that can impact your monthly payment, there are several additional risks that you may not be aware of when you enter into the agreement.

Negative equity

If you want to settle your agreement early to change to a new vehicle, you may owe more than what the car is worth. In this situation, your negative equity may be rolled into a new agreement, leaving you paying interest on the shortfall as well as the cost of the new vehicle, and resulting in an inflated monthly repayment.

Damage and ‘fair wear and tear’ assessments

If you hand the car back, you may have to pay additional charges for anything deemed beyond 'fair wear and tear' by the person who inspects the vehicle. While industry bodies publish guidelines, and you should have received guidance on what constitutes fair wear and tear in your PCP welcome pack, the assessment can be highly subjective, and the level of scrutiny of your vehicle may surprise you.

Commission and conflicts of interest

The FCA’s proposed car finance redress scheme is the culmination of several years of work, and specifically its investigation that it opened on 11 January 2024, into how hidden and excessive commissions and tied arrangements in car finance deals, including PCP, saw consumers pay billions more than they should have done during the term of their agreements.

Although hidden and excessive commissions and tied arrangements are not exclusively associated with PCP agreements, the structuring of this type of finance may have enabled car finance brokers and dealers to engage in mis-selling on a significant scale.

If the drawbacks of PCP were not explained, was that not mis-selling, too?

If your car dealer, acting as a broker, did not explain the potential drawbacks of PCP, this may, in some circumstances, have amounted to mis-selling, depending on the facts and the rules that applied at the time. However, the FCA’s focus has been on the charging of hidden or excessive commissions or the use of tied agreements that made your agreement more expensive than it should have been, not on the features of the product itself, so these arguments, which seem to us in many cases to be strong, will not be a feature of the FCA’s proposed redress scheme.

You will not know if you are eligible to claim without first obtaining disclosure of what commissions, if any, and what type of commissions your dealership (or your car finance broker, if it was not your dealer) received from your lender.

Start a car finance mis-selling claim with Harcus Parker

The regulator's proposed redress scheme means that you can bring your car finance claim yourself, and at no cost. However, there are several potential drawbacks to the FCA's proposals that may mean you do not get everything you are owed and other compelling reasons why you may wish to instruct a solicitor to manage your car finance claim on your behalf.

You can register your car finance mis-selling claim with Harcus Parker here.