HP vs PCP – Which is right for you?
When it comes to buying a car, there are numerous ways to finance your purchase. Two popular options are Hire Purchase (HP) and Personal Contract Purchase (PCP). Both offer flexible ways to spread the cost of a new or used car, but they have distinct differences. Before proceeding with any financial commitment, it is important to evaluate your own personal situation. You may be tempted by lower monthly payments, but there are other aspects to consider. Here you can look into the details for both HP vs PCP.
What is Hire Purchase (HP)?
A Hire Purchase deal is the most straightforward form of car finance. You borrow the required sum of money to buy a car. You then make regular monthly payments over an agreed period to repay the loan with interest. Once you’ve paid off the full amount, the car becomes yours. Find out more about Hire Purchase Finance here…
Benefits of Hire Purchase
Ownership
At the end of the agreement, the car is yours.
Predictable Payments
You’ll know exactly how much you’ll pay each month.
No Final Payment
Unlike some other finance options, there’s no large balloon payment at the end.
Drawbacks of Hire Purchase
Higher Overall Cost
Due to interest charges, you’ll typically pay more for the car than its outright purchase price.
Limited Flexibility
Once you’ve entered into an HP agreement, it can be difficult to adjust or change the details of your agreement.
Longer Repayment Periods
HP agreements often have longer repayment periods than other options, which means you may pay more interest over time.
What is Personal Contract Purchase (PCP)?
A PCP agreement is similar in many ways to a Hire Purchase deal, but there are significant differences. You pay a deposit and make regular monthly payments, but these payments are for the depreciation of the car’s value while you have it. At the end of the term, you have three options:
Pay a Final Payment (Balloon Payment):
If you choose to own the car outright, you will need to make a large final payment.
Part-Exchange the Car:
You can trade in the car for a new one and potentially use the equity to reduce the deposit.
Return the Car:
If you don’t want to keep the car, you can simply return it to the dealership.
If you want to learn more about PCP finance, try our complete guide to Personal Contract Purchase…
Benefits of PCP Finance
Lower Monthly Payments
PCP often offers lower monthly payments compared to HP, as you are not paying the value of the car.
Flexibility
You have options at the end of the term, including returning the car.
Access to Newer Cars
PCP can help you drive newer cars more frequently.
Drawbacks of PCP Finance
Balloon Payment
If you choose to own the car, you’ll need to pay a significant final payment.
Potential Penalties
If you exceed the agreed mileage or damage the car, you may face penalties.
No Ownership
Until you make the final payment, the car belongs to the finance company.
HP vs PCP – Which is right for you
There is no right or wrong answer; it all depends on what you need and what your financial situation is. If you wish to purchase a car and spread the cost, then a Hire Purchase deal is the right way to go. If you are after a newer car and want to change vehicles regularly, then a PCP deal is worth a look. Consider the following factors:
Budget
If you’re looking for lower monthly payments, PCP might be a good option. But remember, if you want to keep the car, you will need to make the large balloon payment at the end of the deal.
Long Term Plans
If you plan to keep the car for a long time, HP could be more suitable. The agreement tends to be slightly longer, and you own the car at the end.
Lifestyle
If you change your cars more often or want the flexibility to return the vehicle, PCP may be preferable, as you could get a brand-new car every couple of years (though you’ll never own them).
It’s essential to carefully consider your financial situation and future plans before choosing HP vs PCP. Consulting with a financial advisor can help you make an informed decision.
Try out our car finance calculator below to see what your monthly payments would be like for both HP and PCP:
Get a picture of your finance quickly
Representative Example: Borrow £6,000 with £1,000 deposit over 48 months with a representative APR of 18.8%, monthly payment would be £174.22, with a total cost of credit of £2,362.56 and a total amount payable of £9,362.56. CarMoney Limited can introduce you to a limited number of finance providers based on your credit rating and we will receive a commission for such introductions this can either be a % of the amount borrowed or a flat fee. This does not influence the interest rate you’re offered in any way. CarMoney is a broker not a lender.
