If you’re looking to buy a car on finance, two of the most popular options that you will be presented with are Personal Contract Purchase (PCP) and Hire Purchase (HP) Finance. In this article we explore key differences between PCP and HP finance, as well as the pros and cons of each to help you decide which one is right for you.
PCP finance is a type of car finance that allows you to spread the cost of a new car over a period of time. With PCP, you pay a deposit (typically around 10% of the car's value) and then make monthly payments for the duration of the agreement. At the end of this contract, you can either trade the car in for a new one (with a new finance agreement), pay a lump sum to buy the car outright, or give the car back if you no longer need it.
HP finance is similar to PCP in that you put down a deposit at the start and make monthly repayments over the agreed term. However with HP, at the end of contract you own the car, as the monthly payments add up to the total cost of the car. At the end of the contract, the car is yours to keep, sell, or do what you wish with.
The main difference between PCP and HP Finance is what happens at the end of the agreement. With PCP, you have the option to make a final payment (known as the "balloon payment") to own the car outright, or you can hand the car back to the finance company. With HP, once you've made all the payments, you own the car outright.
Another difference between the two options is the monthly payments. PCP payments are typically lower than HP Finance payments, as you're not paying towards the full cost of the car. Instead, you're paying towards the cost of the car's depreciation over the course of the agreement.
One of the main advantages of PCP Finance is that the monthly payments are typically lower, which can make it a more affordable option from the outset than HP. Another pro is that you have the option to swap the car or simply hand it back at the end of the finance term, which makes it a flexible option for those who either like to change their car regularly, or only need a vehicle for a fixed amount of time.
One of the main disadvantages of PCP Finance is that you don't own the car outright until you've made the optional final lump sum payment. This means that if you decide not to make that payment, you won't have anything to show for the money you've already paid. Another drawback is that there may be restrictions on the mileage you can do, which can be a problem if you plan on doing a lot of driving.
The biggest pro of HP Finance is that once you've made all the payments, you own the car in its entirety. This is ideal if you're planning on keeping the car for a long time, as you won't have to make any further payments once the agreement is over.
The main disadvantage of HP Finance is that the monthly payments are typically higher than PCP Finance payments, as you're paying towards the full cost of the car. This can make it a less affordable option for some people.
Each option has its pros and cons, so when choosing between HP and PCP finance the right decision for you will depend completely on your individual circumstances. Considering the following factors will help you to reach a decision:
If yes, HP may be the better option for you. If you’re happy to either swap the car (entering into a new agreement) or hand the car back, PCP might be more suitable.
If you need to keep monthly payments down, PCP might be a better option. However, don’t forget that if you want to own the car at the end, you’ll need to make a final “balloon payment” to complete the purchase.
If you want to drive without any restrictions on mileage, PCP might not be the one for you - some PCP agreements restrict this. HP finance options don’t include restrictions as you’re paying towards owning the car yourself at the end.
Choosing between PCP and HP Finance can be a difficult decision, but we hope that the advice in this article helps you to make an informed choice.
Here at Motorfinity, in partnership with our associated car finance company FinanceFinity, we offer a wide range of new cars with PCP and HP finance options, available with discounts for NHS staff, teachers, carers and UK service personnel. Browse our website to learn more or get in touch with a member of our team today to enquire.
If you want to learn more about buying and leasing, we invite you to read our detailed guide on the topic.
Feel free to browse our website to explore the options available or get in touch with a member of our team today to enquire further.