PCP or Credit Union? The Ideal Choice for Car Loan

Have you been considering different financing options for purchasing a new car? Well, a lot of consumers frequently choose Personal Contract Plans or also known as PCP for financing a new car(banking with a credit union).

There are several dealerships available that can offer consumers very attractive looking deals and that too on the spot. For example, affordable deposit, reduced monthly payments, etc. But what many don’t realize is the pitfalls that come with the PCP agreement.

On the contrary, it is a wiser decision to check banking with a credit union as a finance option as there are lesser risks involved compared to PCP. Continue to read till the end to learn more on which option is the best for car loan, PCP or credit union.

Type of Ownership

When consumers opt for PCP, they are in the hire-purchase agreement where the terms are such that you don’t really own the car until the final payment is cleared. This means that if you wish to change the purchased car or face any difficulties related to the car during the term of agreement, you cannot sell the car without the agreement of the financing dealer as you have no ownership over the car.

You are not really owning the car until the GMFV is paid. This payment involves the large final lump sum amount that needs to be paid at the agreement’s end and how it will actually cost you to own the car finally.

But with a credit union, the ownership of the car remains to be with the consumer from the beginning itself. Therefore, you own the car from day one itself as you opt to purchase the car with the financing option of the credit union.

Balloon Payments Involved

A balloon payment is basically a one-time larger-than-usual payment at the end of the loan term. This type of payment scheme is frequently involved in PCP as it is broken into three parts which are –

  1. Initially, it is the deposit which usually comprises 20-30% of the car value.
  2. The next includes the fixed monthly installment repayments, generally lower as a large portion of the car’s cost is not paid until the agreement’s end, and
  3. The GMFV (Guaranteed Minimum Future Value) which involves the balloon payment scheme that can be anything up to the 50% of the car value.

Until the final pay off, the consumer doesn’t have the ownership of the car. But with large credit unions or even for some community-focused credit unions, there are no surprise payments involved at the loan term’s end. The payments remain similar all throughout the term.

Negative Equity

When you purchase a car, its value is lost to depreciation almost immediately. Initially, this happens rapidly but eventually it does slow down. Now this is a common thing and by taking a credit union loan, the consumers don’t have to deal with much of the issue.

Since as the depreciation starts to slow down, your payments begin to catch up resulting in balancing out everything. However, with a PCP, there could be an issue especially if you have paid a small deposit amount in the beginning.

As you may never really be able to catch up with the car’s depreciation. The problem occurs if you want to change the car or even if your financial situation changes and have the urge to get out of the PCP agreement early, as selling the car won’t be sufficient than what you owe to the dealer.

Therefore, PCP puts the consumers in a really bad situation in comparison to credit unions that are pretty adaptable.

Flexibility of Paying Off Loan

The PCP monthly payment of loan is fixed over the agreement’s term. This means that if you wish to pay an extra amount each month to finish the repayment early then you will be charged with a penalty fee for reconstructing the agreement in any way.

Also, if you agree to be someone’s guarantor if they wish to take a PCP loan then you become a joint hirer rather than being just a guarantor. Any missed out payments on their end will appear on your credit record. This would impact your chances of getting a loan in the future.

But credit unions are quite flexible when it comes to paying off the loan. There is no penalty fee involved if you wish to pay off the loan quickly or early. Hence, you have the freedom to pay extra each month.

Additionally, credit unions frequently run on the concept of helping out the communities and there are in fact, many community-focused credit unions. This means rather than their own profit they focus on offering perks to the consumers and hence, the terms of the agreement can be renegotiated if your financial circumstance changes by any chance.

Total Cost Involved

While the PCP loans look quite impressive with lower deposits and reduced fixed monthly payments, making them appear easy to manage and even a reasonable financial option to choose. But in reality, the total cost over the term of agreement needs to be considered and calculated.

But as mentioned before, PCP involves balloon payment schemes along with penalty-charged loan agreements that makes the total cost more expensive. Most importantly, you won’t even have ownership for the car.

Whereas, for credit unions the total cost over the loan term can be reasonable and much more manageable and should your financial situation change then you can choose to finish the payments early as well.


Banking with a credit union is not just beneficial for a variety of services but can also be full of perks for taking out a car loan. Even though the PCP may be a popular financing option to choose and even seem to be advantageous, the hidden pitfalls can be tumultuous.

To choose the best financing option, make sure to consult an expert and consider all the factors that can influence your loan agreements involved. Purchasing a car is a big decision and choosing the ideal financial option sets the right path towards decision making.


CU BUSINESS News is the only all-digital, all-business resource for credit unions. Our readers are credit union executives, branch managers, credit union personnel and others who need to stay informed and educated about industry news and best practices. Every day (seven days each week), our contributors and publishing team sends new articles packed with information specifically for credit union executives.

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