Personal Contract Purchase (PCP) vs Hire Purchase (HP) – which car finance type is best for you?

If you’re in the market for a vehicle, you’ll likely be considering your options for finance. Knowing which finance type works best for your circumstances is an important step in your leasing journey. Here, we compare two car finance options; Personal Contract Purchase (PCP) vs Hire Purchase (HP), assessing the pros and cons of each, to take you one step closer to deciding which is best for you.

Which one is right for you? Personal Contract Purchase vs Hire Purchase when it comes to getting a car.

What is PCP car finance?

This type of car finance has grown in popularity for its rock-bottom rates and flexibility. Personal Contract Purchase, or PCP, is a finance option that allows you to change your vehicle regularly. What makes PCP different to HP? With HP, your monthly payments cover the entire cost of the vehicle. With PCP, you will only cover the cost of depreciation of the car plus interest. This will be paid over the agreed term. Therefore, your monthly payments are likely to be lower than most other finance alternatives.

When it comes to the end of your agreement, there’s more flexibility. You have three options; choose to make the final balloon payment if you want to keep the car, part-exchange the vehicle for another, or hand the car back to the finance company. Whichever option is best for you at that time.

How does PCP car finance work?

PCP is a simple car finance solution. Find the car that you want to drive, and work out how much deposit you want to put down – if any. Then choose how long you want the agreement to last.

The annual mileage limit you choose will determine your monthly payments. The more miles the car has driven at the end of the term, the less it’ll be worth. Therefore, the more miles you do each year, the higher your monthly payments will be. This is because you’re covering the cost of the car’s depreciation.

Once those details have been set, you can drive the car for as long as the agreement lasts. At the end of the agreement, you can part exchange, keep, or hand the car back.

Remember: you are still liable for the full amount of the vehicle if anything happens to the car or if you settle early.

Pros and cons of PCP

Pros

Lower monthly payments as you are only paying the cost of depreciation plus interest over the agreed term.
Simply walk away at the end of your contract if you don’t want to buy the car.
Change your car every few years without worrying about selling it on.
If at the end of your term your car is worth more than the GMFV, you’ll have some positive equity to contribute towards your next car.
£0 deposit option with us.

Cons

If you want to buy the car at the end of your contract, you will need to pay your final balloon payment, which is often a large sum that could require a loan.
If you exceed your annual mileage allowance, there will be excess charges.
If your car isn’t worth its predicted Guaranteed Minimum Future Value (GMFV), you’ll have to cover the cost if you part exchange the vehicle.
You won’t have the option to own the car until you have made all your repayments.
If the car has damage at the end of your contract, you’ll face charges.

Can you settle a PCP deal early?

It depends on the terms of your contract. You can normally settle your deal early, however the finance company will require you to pay off the difference between what your car is worth now, and what you still owe (negative equity).

What is HP car finance and how does it work?

A Hire Purchase (HP) car agreement is the most practical way for private motorists to get a car. HP agreements can be offered on new and used cars and allow you to spread the cost of buying a vehicle rather than having to put up all the cash up front.

If you choose HP car finance, you will agree to pay an initial deposit – we off zero deposit options – and go on to pay off the entire value of the car, plus interest, in monthly instalments, over a fixed period – anything from 24 to 60 months. You will be given an option of ownership fee at the end of your agreement to become the legal owner of the vehicle.

Unlike with PCP deals, HP agreements don’t require a large final payment to become the owner of the car. In addition, there is usually no annual mileage restriction as with PCP deals.

Pros

Cons

Drive away in a car of your choice that you may not have been able to buy outright.
No mileage restrictions.
Option to legally own the car at the end of your agreement.
Because the loan is secured against the car, people with poor credit records have a better chance of being able to sign up for a HP deal.

Higher monthly payments as you’ll be paying off the full value of the car.
If you can no longer make monthly repayments, the borrower has the right to repossess the car.
You won’t be able to sell the car without settling the finance.
You won’t own the car until you have made all your repayments.

Personal Contract Purchase vs Hire Purchase – which car finance is ideal for you?

Only you know which type of car finance suits your circumstances. When it comes to Personal Contract Purchase vs Hire Purchase, the main distinctions are below:

If you’re unable to afford cash up front and prefer hassle-free motoring with the advantage of owning the car at the end of your agreement, HP is most likely the best car finance for you.

However, if you’d rather have the flexibility to part exchange the car, or eventually own it, and you want low monthly payments – PCP is the best option for you.

Are there any alternative types of car finance?

There are several different car finance types, and your priorities will determine which is best for you.

For those with good credit, a personal loan could be a great option. This amount can make up the full purchase cost of the vehicle you want to buy, or make up the shortfall of cash. This is best for those wanting ownership of a vehicle.

If ownership is not the goal and all you need is a reliable car quickly then leasing – formally called Personal Contract Hire (PCH) – offers a low-cost, low-commitment way to drive the car you want over a set amount of time.