Introduction
Buying a car is a big financial decision and let’s face it, most of us can’t pay for everything upfront.
This is where car financing comes into play. Two of the most popular financing options in the UK are Hire Purchase (HP) and Personal Contract Purchase (PCP). Both offer a way to spread the cost of a new vehicle, but they work differently and have their own benefits and drawbacks.
Understanding these differences will help you choose the right option for your budget and car ownership goals. So, we’ve done the geeky bit and laid out some of the details of the exciting world of HP and PCP.
What is Hire Purchase (HP)
Hire Purchase is the good old straightforward way of financing a car, where you agree to pay off the cost of your car in monthly instalments over an agreed period. Typically, this will range from one to five years.
What are the key features of HP?
- The loan: With HP, the loan you take out covers the total value of the car.
- Ownership: You’ll only own the car outright after making the final payment.
- Deposits and payments: HP requires an initial deposit, usually around 10% of the car’s value, followed by monthly payments.
- Interest: Interest is added to the loan, which is fixed throughout the term.
What are some of the pros and cons of HP?
Pros:
- Predictable monthly payments allow you to spread the cost of your car.
- It can be easier to get HP finance, even if you have bad credit.
- You’ll have full legal ownership over the car after the final payment.
- There are usually no mileage restrictions, meaning you can use the car as much as you want.
Cons:
- The added interest means you’ll pay more than the car’s actual price.
- There may be an ‘option to purchase’ fee at the end of the loan to cover admin, which can be around £100-200.
- During the term, you likely won’t be able to sell or change your car without getting a hefty fee.
- If you can’t meet your repayments, the car might be taken away.
Top tip!
Many HP deals will allow you to pay off your car early. It can be a good choice if you can afford it. Although you’ll be paying a higher sum in one go, you’ll also save a lot on interest that you would have had to pay for the rest of the term.
What is Personal Contract Purchase (PCP)?
Personal Contract Purchase is a bit more complex and offers greater flexibility. Like HP, it involves paying a deposit and making monthly payments. How these payments are structured and what happens at the end of the term, on the other hand, are quite different.
What are the key features of PCP?
- The loan: With PCP, your loan only covers the depreciation value, in other words, how much your lender predicts the car will lose in value over the term.
- Ownership: At the end of the term, you’ll have three options: return the car, make a larger, one-off balloon payment to own it, or trade it in for a new car.
- Deposits and payments: PCP requires an initial deposit, usually around 10%, followed by monthly payments.
- Interest: Interest is also applied, which can make the total cost higher, especially if you decide to make the balloon payment at the end of your term.
- Guaranteed Minimum Future Value (GMFV): This is the car’s expected value at the end of the agreement and is key in how your monthly payments are calculated. Choose My Car have an intuitive Car Finance Calculator, designed to make the process even easier.
What are some of the pros and cons of PCP?
Pros:
- You have more choice with what you want to do with the car at the end of the term.
- If you want to change your car at the end of the agreement, you can do so without the hassle of having to sell it.
- Because the loan covers the depreciation value only, the monthly payments are often lower than other types of finance like HP.
Cons:
- Watch out for any mileage restrictions in your PCP agreement. If you go over, you’ll be charged extra.
- If you want to own the car, the final balloon payment can be very expensive.
- If you can’t meet the repayments, your car may be repossessed.
- If the depreciation value is close to the total value of the car, you may not have much equity to put towards your next car after the contract is ended.
Top tip!
If you’re looking for a better PCP deal, try choosing a make and model of car that keeps more of its value. That way, you’ll have to borrow less and in turn pay less.
Weighing up which one is right for you
Ultimately, when it comes to HP vs. HCP, the one that’s right for you is going to depend on your circumstances and how you plan to use the car.
With Hire Purchase, think of it as entering into a bigger commitment. At the end of the term the car will be yours to keep, modify or sell if you decide you don’t want it anymore, bearing in mind it will be your responsibility to sell it. The lack of mileage restrictions is also great if you know you’re going to be on the road a lot.
Personal Contract Purchase, on the other hand, offers way more in the way of flexibility. If your circumstances might change, or you think you’ll want a shiny new set of wheels at the end of the contract, it’s entirely your choice to give the car back or upgrade to a new PCP contract. Your monthly payments may also be more affordable, but just remember that there will be a pricy balloon payment if you choose to keep the car.
The amount you can put towards your deposit and the length of the term can also affect the monthly repayments, so make sure to think about what you can afford and what different deals you can get before committing to one. If you’d like more tips and advice on car finance and choosing the right car for you, check out the rest of our blog.
