Before financing your car it’s essential that you select a finance model to suit your needs. This guide explains the main differences between PCP (Personal Contract Purchase) and HP (Hire Purchase).
Both PCP and HP financial plans are arranged around an initial deposit followed by a string of monthly payments. In both cases, these monthly payments vary in amount depending on the cost of the car, its age, the length of the contract, and the size of the initial deposit.
With PCP, the monthly payments equal the amount of value the car has lost while you’ve been driving it – the difference between the initial price and its predicted value at the end of the contract. With HP, the monthly payments cover the entire cost of the car and, in the end, you are the legal owner with nothing outstanding to pay.
Here at Go Car Credit, we offer car finance without deposits making it a suitable option if you would rather keep the funds in your pocket.
WHAT IS HIRE PURCHASE (HP)?
Hire Purchase (HP) is a type of borrowing where you spread the cost of the car over a certain time period, for example 36 months, and make monthly instalments until you have paid off the amount in full. You don’t own the car until you have paid in full. You don’t usually need a deposit but having one may help your application.
WHAT IS PERSONAL CONTRACT PURCHASE (PCP)?
A PCP agreement typically lasts between 24 and 48 months and over that time, rather than paying off the vehicle’s full value, you’ll pay off only a part of what it’s worth at the time of purchase, minus the deposit and plus interest.
You will need to pay a deposit at the start of the agreement and if you want to own the car outright, you will need to pay a final one-off balloon payment at the end of your PCP agreement. This is the minimum future value of the vehicle, which will have been agreed at the start of the deal.
You’ll only pay it if you want to keep the car, you do have the option to hand back the car at the end of the agreement and not pay the balloon payment. Because of this, the monthly payments are only paying the for the difference between the total price of the car and this optional final payment that is required with PCP. For this reason, many people choose PCP over HP, so they can enjoy cheaper monthly payments over the course of the finance agreement.
DIFFERENCE BETWEEN PCP AND HP MONTHLY PAYMENTS
When comparing HP and PCP finance options for a car, PCP finance repayments will often be cheaper than HP finance repayments. With HP, you pay a monthly payment until you own the car at the end of the agreement, therefore you’re paying for the vehicle’s full value.
However, with PCP, a large amount of the car’s value is tied up in what’s called the GMFV (Guaranteed Minimum Future Value), an optional payment that is paid at the end to own the car, this is sometimes referred to as a balloon payment.
It means that if you choose PCP, your monthly payments are only paying for the difference between the total price of the car and this optional final payment. For this reason, many people choose PCP over HP, so they can enjoy cheaper monthly payments over the course of the finance agreement.
IS PCP BETTER THAN HP?
One is not better than the other, but it is dependent on your circumstances as to which one may be a more suitable option. For example, if you want low monthly payments or want the flexibility to hand back the car at the end of the agreement, PCP may be the better option.
If you want to own the car outright at the end of the agreement or don’t have a deposit to add into the deal upfront then HP may be the better option.
BENEFITS OF HP
- Available on most ages of car, new and used so you have a lot of choice when looking for that perfect car.
- Flexible deposit; as little as zero in many cases. Here at Go Car Credit we offer zero deposit hire purchase finance.
- Repayments can be spread over a term to suit you.
- No mileage penalties, meaning you don’t have to think about limiting your mileage during the agreement.
- You pay less interest overall than with PCP, as you’re paying off the balance financed faster.
- The car is paid off by the end of the term and you take ownership, at which point you can keep it or sell it.
BENEFITS OF PCP
- Lower monthly repayments than hire purchase.
- You don’t need to worry about the future trade-in or resale value of the car, as the lender guarantees your car will be worth a minimum sum at the end of the deal.
- Flexibility. You’ve several options at the end of it – you can even buy the car if you want to.
- PCP may let you buy a more expensive car than you might otherwise be able to afford but with monthly payments to suit your budget.
- As PCP deals are usually only offered on new or nearly new cars, you don’t have to worry about an old car that’s likely to need money spent on costly repairs.
LIMITATIONS OF HP
Car ownership – you can only own the car at the end of the contract, unlike PCP which allows you a handful of options at the end of your agreement.
LIMITATIONS OF PCP
Mileage limit – at the start of the contract, you will need to agree to a mileage limit or you will incur excess mileage charges at the end of the contract. A mileage limit is set because this is a key factor in working out the car’s value at the end of the agreement – the more miles the car does, the lower the value will be and the higher the monthly payment cost.
You will therefore need to be fairly confident about the miles you think you will do during the contract terms. Car damages – any damage will come at a cost at the end of the agreement or you will need to get any damage repaired before the end of the agreement to ensure you don’t incur any additional charges.
WHAT HAPPENS AT THE END OF CONTRACT?
Once you’ve completed your monthly payments on an HP agreement over the specified duration, the car is now legally yours. You are then free to do as you please with the car, keep it, sell it privately or use it as a part exchange deposit on another car. It is slightly more complex with PCP as you have three options upon completing your PCP finance agreement, which are:
1. Hand the car back and walk away without paying the Guaranteed Minimum Future Value.
2. Pay the Guaranteed Minimum Future Value to make the car yours.
3. Use any equity in the car to part exchange it for another car with the dealership.
HOW OUR FINANCE WORKS
Apply – Apply for our car finance by submitting an application. This will take you less than 2 minutes.
Decision – Once we have all the information we require, we will send your application to our underwriting team who will review all the details and come back to us very quickly with a decision for approval.
Car – Once we have approved you for finance, we can provide a list of dealers we work with within your area. You get to work on choosing your perfect car.
Sign – Once you have chosen the perfect car you will sign all of the documentation online and then you can drive away your new car.
Here at Go Car Credit we only provide hire purchase car finance but we wanted to provide information on both hire purchase and personal contract purchase so you can be more informed on the options available to you.
We would always suggest that you do your research when looking for finance products. There are many resources available online so you can compare options fairly.