Personal Contract Purchase (PCP) v Hire Purchase (HP)

Car finance is now the most popular way to buy a new car. In fact, 90% of new vehicles get bought using a finance plan, which shows how popular and efficient this method is.

There are many benefits to buying a car on finance, but it can get complicated because of the various options available and the pros and cons. The most popular are Personal Contract Purchase (PCP) and Hire Purchase (HP).

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We will look into these options in this article and answer the most frequently asked questions. PCP and HP both have excellent benefits and when it comes to taking out your financial plan, it will come down to which option suits you best.

The primary difference between the two finance types is that at the end of your PCP, you can hand the car back without paying anything more, pay the balloon payment and own the vehicle outright, or refinance your deal and reduce your monthly outgoings. You can do the latter while keeping your car until you decide on whether to pay the new balloon payment in the future. Whereas, with an HP, you will own the vehicle at the end of your deal. 

What is PCP car finance?

A PCP finance deal offers more flexibility during and at the end of your term. You will borrow less money than the vehicle is valued, minus the initial deposit you put down, which can be whatever you like, but generally 5-10%.

It means that over the duration of your agreement, you will pay less per month, meaning you have more of a say in the structure of your payment plan and how much you ideally wish to spend.

The main difference between PCP and HP is at the end of your PCP, there are three options.

1. Pay the final balloon payment to own the car outright
2. Hand back the vehicle and pay no more for it
3. Refinance your deal to keep the car, extend the term, and reduce your monthly repayments. 

As you won't own the car unless you make the balloon payment at the end of your term, you need to keep the vehicle in good condition to ensure that if you do hand the car back, you don't get excess damage charges.

What is HP car finance?

An HP finance deal is easier to understand. You borrow the total amount of the car's value, and once you've made all of the monthly repayments over your agreed term, you then own the vehicle outright.

Like a PCP, you put down an initial deposit- generally more than a PCP of 10%+ - and agree on a length of time you want to make your fixed monthly repayments, and once you've made them all, the car is yours.

Do I need to pay a deposit?

PCP and HP

You should put down a deposit to help reduce the overall monthly repayments. However, in some cases, you may be able to get 0% deposit finance, though that's at the discretion of your finance lender.

How much can I borrow?

PCP

You will borrow a good chunk of the car's value minus the deposit. The balloon payment at the end of your deal means you won't be borrowing the total amount upfront.

HP

You will borrow the total value of the car minus the deposit.

How much will my monthly repayments be?

PCP

Generally less than on an HP because you're borrowing less from the finance lender. PCP finance is flexible, and you will be able to have more of a say in how much you want to pay per month - within reason depending on the car you wish to buy.

HP

You are borrowing the total value, so it's generally more than a PCP. You are also contributing to owning the vehicle outright at the end of the deal, unlike with a PCP.

Can I decide the length of the term?

PCP

You will be able to make a decision on how long you wish to make your payments - generally 12 to 60 months.

HP

You will be able to make a decision on how long you wish to make your payments - generally 12 to 84 months.

Will there be a balloon payment?

PCP

Yes. At the end of your deal, there will be a balloon payment, also known as an optional final payment. You can decide whether to make the payment and own the car outright, hand the car back without paying a penny more, or refinancing your deal to keep the car for longer while reducing your monthly payments and a future balloon payment.

HP

No, the balloon payment is only a feature on a PCP deal.

Will I own the car at the end of the agreement?

PCP

No, unless you make the balloon payment to pay off the final value of the car.

HP

Yes, once you've made the final payment, you will own the car.

What other options are available to me at the end of the deal?

PCP

If you don't want to make the balloon payment, you can hand the car back with no extra charges if the vehicle is in good condition or refinance the deal to reduce the monthly repayments and future balloon.

HP

You will own the car, so you can choose to do with it what you wish, including selling it or trading it in for something new.

Can I settle my agreement early?

PCP

Yes, however, you will need to pay an early settlement figure in addition to your final balloon payment if you want to own the car or part exchange for something new.

HP

Yes, you can settle your HP deal whenever you wish.

What extra charges should I expect?

PCP

If you want to hand the car back at the end of the deal and it has incurred any damage, you may be liable to cover the repair charges. At the start of the agreement, you would have agreed to an annual mileage allowance, and if you've gone over that amount, you will get charged per extra mile.

HP

No, you will pay the same fixed monthly rate until everything is repaid, and then the car is yours.

Is PCP or HP finance best for me?

Choosing which finance plan to go on will depend on the individual's circumstances. It's critical to understand what you're getting into before signing anything.

PCP

If you're the type of person who would like to change their car every few years without ever owning it outright yourself, then PCP finance is the option for you. 

Not only that but because you're borrowing less money due to the balloon payment, you can do it on a budget if you really need a car but not necessarily the highest income to afford it. 

Alternatively, you could buy a more expensive car than you'd usually go for because you're not paying its total value.

HP

If you want to own a car outright, are not fussed about having the latest make and model, or are too worried about having to deal with selling it on yourself in the future, then HP is the one for you.

Your personal needs and budget will determine which option is best for you.