UK finance jargon - in plain English
A car finance deal with a large optional final payment.
Personal Contract Purchase (PCP) is one of the most common ways to finance a car in the UK. You pay a deposit, then relatively low monthly payments over a set term (typically two to four years). At the end, you have three options: pay a large final "balloon payment" to own the car outright, hand the car back and walk away, or use any equity in the car toward a new PCP deal. The low monthly payments are possible because a large portion of the car's cost is deferred to the end.
You take PCP on a £22,000 car with a £2,000 deposit, 48 monthly payments of £280, and an £8,500 balloon payment at the end. If you hand the car back, you've paid £15,440 over four years for use of the car, not ownership. If you pay the balloon, the total comes to £23,940. The monthly payment alone doesn't tell you what the car is actually costing you.
Numbers simplified for illustration. Actual rates, balloon payments, and total costs vary by lender, car value, and agreement terms.
People judge affordability purely on the monthly payment. PCP payments are deliberately low because a large chunk is deferred to the balloon at the end. Without accounting for that final payment, or understanding what happens if you can't pay it, you don't have a clear picture of what the deal actually costs. Always calculate the total amount payable before signing.