What’s the difference between PCP and HP and which finance should you choose?

Personal contract purchase (PCP) and hire purchase (HP) are two of the most popular car finance types. But which one should you get and what exactly is the difference between them?

There are similarities between the two options and it entirely depends on what you’re looking for when deciding which one is the best suited for you.

A PCP deal allows you to lease a car for an agreed period of time, usually 48 months. At the end, you can choose to return the car, upgrade to another, or pay the remaining value on the vehicle and own it – which is usually a bigger sum than your monthly payments.

Meanwhile, with HP, you split the entire cost of the vehicle evenly over an agreed period, usually between 36-60 months, and at the end, you own the car outright.

What is PCP?

Personal contract purchase (PCP) is one of the most common car finance types in today’s world.

That’s partly down to its flexible nature – whereby you have three options at the end of your agreement and you don’t need to decide which one you’re going to take until you get to that point.

But also, with PCP, the monthly payments are usually lower than standard car finance, such as hire purchase (HP). The payments are also fixed, so you always know what you’re paying and can budget accordingly.

As previously mentioned, at the end of a PCP agreement, you have three options of what to do with your car.

Pay the balloon payment

The first is that you can pay off the balloon payment and become the legal owner of the vehicle.

The balloon payment is calculated by estimating how much the car will be worth at the end of the agreement. It’s also called a final payment or guaranteed minimum future value (GMFV).

The reason there’s a balloon payment on a PCP is that unless you choose to pay that final payment, you’re never the legal owner of the vehicle.

Instead, your monthly payments cover the depreciation of the car while you’re the registered keeper – which is why the monthly payments are usually lower than hire purchase.

Hand the car back

With a PCP deal, you can also choose to simply hand the car back at the end of your term. You then have the freedom to start a fresh agreement if you wish.

There’s no additional charge to pay unless you go over your agreed mileage or there’s damage outside fair wear and tear standards.

This option removes any worry you may have about depreciation or having to sell the vehicle at the end.

Part exchange the car for another

The third option is to part exchange your vehicle for another car.

If you choose this option – which most people do – the value of your vehicle at the time will be compared against how much you still owe on your finance.

If your car is worth more than what you owe – which it may be if it hasn’t depreciated as much as expected or you’ve done fewer miles than predicted – then you can use that extra value as a deposit on your new model. That’ll help lower your payments even further.

However, if it’s worth less when you come to trade it in, don’t panic. Yes, you’ll have to cover the shortfall, but you can usually build it into your new finance agreement, so you don’t have a big payment to make.

What is Hire Purchase?

Hire purchase (HP) is an agreement whereby you spread the total value of the car evenly over an agreed amount of time.

You’re paying to have complete ownership of the car. However, throughout the term, the legal owner of the car is the finance provider – in the same way as a PCP agreement. But once you make your final monthly payment, that ownership is transferred to you.

With a HP agreement, although your monthly payment may be higher than a PCP and you may be paying over a longer period of time, there’s no big balloon payment at the end to become the legal owner.

That’s because you’ve been covering the entire cost of the vehicle through your monthly payments, rather than just the depreciation as you do in a PCP.

Of course, you still have options during your hire purchase agreement if your circumstances, wants or needs change, and it can be flexible and work around you.

Early settlement

If you’re able to, you can pay off the remaining finance at any point of your hire purchase agreement and become the legal owner.

However, if that’s something you plan on doing, make sure you read your contract before signing to ensure there aren’t any big early repayment charges.

Make the car last

For most people, hire purchase is the finance option they choose because they want to keep the vehicle for a long period of time.

If properly maintained, a car should be able to last for around 200,000 miles. And if always having the latest model isn’t important to you, or you’re not bothered about upgrading your car every few years, then hire purchase can be a great way to save money in the long run – as once you’ve finished your monthly payments, you don’t have to worry about a big monthly outgoing.

By making the car last, you can continue driving a vehicle you enjoy while not having to constantly make monthly payments.

Part exchange or sell privately

Once the car is yours at the end of your agreement, you can part exchange it for another or sell privately.

You may be thinking: “Why would I take out a hire purchase to then part exchange it – surely a PCP would be best for that situation?”

But that’s not always the case. As it’s your car, and there’s no finance left to pay, you can use it as a sizeable deposit on another model. That means you might be able to get a better car to fit into your budget or have lower monthly repayments on your next finance agreement.

Of course, you can always sell the vehicle privately once it’s legally yours, too. You’ll often get a better price if you sell it privately; however, you’ll also usually have to encounter timewasters and hagglers. And if that’s not your thing, selling your car privately can become a big headache.

What’s the difference between PCP & HP?

So now we know more about PCP and HP agreements, it’s time to put them against one another to see the differences. To make it easier, we’ll go from the start of the term to the end.

Credit score

A big difference between both PCP and HP agreements is how likely you are to be accepted for them.

If you don’t have great credit, there’s a higher chance you’ll be accepted for hire purchase than personal contract purchase.

Check to see if you’re eligible for car finance here.

Mileage

Before you start your PCP agreement, you need to predict how many miles a year you’re going to cover. That’s to help work out your monthly payments and how much your balloon payment will be.

With a HP, there are no mileage restrictions, so you can drive as many miles as you wish without having to worry.

Monthly payments

Monthly payments on a PCP are usually lower than those on HP. That’s because on a PCP agreement, you’re only covering the cost of the depreciation of the vehicle while you’re the registered keeper.

While on a HP, you’re covering the entire cost of the vehicle in your monthly payments.

Contract length

A PCP agreement is usually shorter than a HP agreement, meaning you can change your vehicle more regularly.

A typical PCP agreement lasts between 24 and 48 months, whereas a typical HP term is 36 to 60 months.

End of your agreement

At the end of your PCP agreement, you have three options. Part exchange the vehicle for another, pay the balloon payment and keep it, or hand the car back to the finance company and walk away.

The added flexibility means that you can change your decision depending on your circumstances at the time – rather than trying to predict what life might be like in years to come.

Meanwhile, at the end your HP agreement, you’re now the legal owner of the vehicle. So, you can use it as a deposit on another car, keep the vehicle, or sell it privately for cash.

Deposit

Here at Zero Deposit Car Leasing, all our PCP and HP deals come with £0 deposit.

So, even though it’s not a difference – which is why we’ve put it last – it’s something worth remembering when thinking about your budget.

PCP vs HP: Which finance should you choose?

Now you know more about PCP and HP, you can make a decision on what’s best for you.

If you want to change your car every few years, enjoy lower monthly payments and have more flexibility in your options when your agreement ends, then a PCP will most likely be the one you want.

However, if you’re not fussy about upgrading your car regularly and would rather keep it or use it as a deposit – all the while being the legal owner – then a HP finance would probably suit you better.

If you’re still unsure about which type of finance is right for you, you can read our guides below.

car advice Car finance Hire Purchase HP PCP Personal Contract Purchase