If you’re thinking about buying a car, the issue of car finance will probably arise. And one of the most popular options you’ll be given is PCP — personal contract purchase.

While similar to hire purchase (HP), PCP involves a few significant differences which will affect how much you pay every month and how much your final payment will be. Read on to discover whether or not PCP is the best motor finance option for you.

On the face of it, PCP might look very similar to hire purchase. You can choose a deposit, and you then have to pay monthly payments for a fixed period (usually up to five years).

But at the end of the agreed term, you’ll have the option to make a final payment to take ownership of the car or return it. Alternatively, you’ll be able to use any equity you’ve built up in the car to fund a deposit for your next car loan.

To obtain legal ownership of a car at the end of a PCP agreement, you’ll need to pay the Guaranteed Minimum Future Value (GMFV), which some lenders may describe as a balloon payment.

While PCP monthly payments are usually significantly lower than HP payments, the balloon payment at the end of the agreement is the price you pay. If you want full ownership of the vehicle, you’ll need to find a significant sum to satisfy the GMFV.

PCP is making car ownership more affordable for more people — and there are a few additional benefits to consider.

● You have the flexibility that comes from being able to take ownership of the vehicle or hand it back to the finance company

● Monthly payments are usually significantly lower

● Monthly payments are fixed for the duration of the agreement — making budgeting easier

● PCP car finance is agreed in advance, which puts you in a strong negotiating position

While PCP is making car ownership more affordable for millions of people, it’s not without a few drawbacks — all of which you should consider before taking the plunge.

● Charges may apply if you decide to return the car at the end of the agreement in a condition that’s deemed different to that which was initially agreed upon. For example, you may be charged if you’ve exceeded the mileage allowance or returned the car with damage

● You’ll usually have to pay the car’s estimated market value (GMFV) to take ownership at the end of the agreement

● You pay interest on the GMFV as part of all your monthly payments — whether or not you intend to take ownership at the end of the agreement

Before you accept an offer of PCP, you should think carefully about what you intend to do at the end of the agreement.

Return the car with nothing else to pay

You’ll only have nothing to pay if you return the vehicle in good condition and without exceeding the agreed mileage limit.

Return the car and commence a new PCP agreement

If you have built up equity in the car, you can use some or all of it as a deposit for your next PCP agreement. This is a great way of getting into an expensive car you otherwise wouldn’t be able to afford.

You pay the balloon payment to take full ownership of the vehicle

If you’re determined to own the vehicle at the end of the contract, you’ll need to pay a substantial balloon payment — the estimated market value of the car.

To help you decide which option is right for you, it’s best to get advice from an expert or an experienced motor finance broker. This is a decision that will determine how much you pay for your car for the next few years, so it’s important to explore every option carefully.