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Car finance: how to choose between PCP and Hire Purchase

  • Work out whether PCP or Hire Purchase works best for you
  • PCP lets drivers choose whether to buy the car or return it
  • Less interest is typically charged on Hire Purchase schemes

Choosing what finance option to go for can be a tricky decision for many drivers, with a baffling variety of APR charges, contract terms and ownership options.

Two of the most common finance formats are PCP – Personal Contract Purchase – and Hire Purchase. Both let you pay an upfront deposit and a series of monthly payments, but that's where the similarities end.

PCP schemes let you put off deciding whether to buy the car outright or simply return the keys until the end of the contract. Meanwhile, Hire Purchase (HP) is such that you take ownership of the car as soon as you’ve made the final payment.

Monthly payments also differ, with bills coming in much lower for PCP deals than equivalent HP offers (assuming the same deposit and contract length). This is because PCP deals defer some of the car’s value into a large optional final payment; pay this and the car’s yours or just hand it back.

Stick to the pre-agreed mileage limit and keep the car in good nick with PCP and you should have nothing left to pay, should you return the keys. Be aware, though, that you may be stung with hefty charges if you cover more miles than agreed or hand back a damaged car.

If you’re considering purchasing a new car on finance, make sure you visit our finance calculator to find out how much you can afford to borrow. We work with over 20 lenders to give you access to more than 100 lending options.

And don’t forget to check out our Deal Watch page for all the week’s best finance offers.

Hire Purchase (HP, also known as Conditional Sale)

HP is one of the simplest forms of finance available. The cost of the car is split across a deposit and a number of monthly payments and once you’ve paid these, the car is yours. Credit is secured against the car, so as soon as you’ve made the final payment, ownership is automatically transferred to you.

You’ll typically have to put down at least 10 percent of the price as a deposit, though putting down a bigger upfront payment can sometimes unlock lower – or even zero percent – APR.

The contract term and monthly payments are set at the beginning of the term, so you know exactly how much you’ll have to budget each month. Interest rates can be as low as zero percent with several manufacturers – and for up to five years in some cases – with little risk to the lender as you’ll take ownership at the end of the contract.

On the flip side, should used values for this model drop faster than expected, you will be stuck with a car that is worth less than anticipated. This is only an issue if you plan to sell the car on shortly after taking ownership, though.

As HP contracts can last longer than PCP deals, the difference between monthly payments can be reduced. As you’re paying off the balance of the loan quicker with Hire Purchase, you’ll typically pay less in interest too – provided you’re not comparing zero percent APR deals, of course.

Furthermore, you won’t have to save up a large amount to pay off the optional final payment at the end of the contract with HP to take ownership. This contrasts with PCP where the final payment can weigh in at more than half of the car’s list price.

Pros:

  • Less interest charged (provided the same APR)
  • Longer-term options make car ownership affordable
  • Very simple with no excess mileage or damage charges

Cons:

  • Higher monthly payments than an equivalent PCP contract
  • Car could be worth less than expected when contract ends
  • A larger deposit is usually required with Hire Purchase

Personal Contract Purchase (PCP)

PCP is by far the most popular way of funding a car. Affordable monthly payments, low deposits and added flexibility – with drivers able to choose whether to buy the car or return it at the end of the contract – mean that PCP can be the easiest way to get the car you want in budget.

With zero percent APR and zero deposit deals available – plus substantial deposit contributions thrown in by many manufacturers – purchasing a car through PCP can often cost less than simply paying the list price.

A number of car makers also offer “packaged” deals, which include servicing, insurance and car tax for a higher monthly cost – making it easy to budget for all your motoring bills.

What really makes PCP stand out, however, is the freedom to decide what to do with the car at the end of the term. You can pay the optional final payment and take ownership of the car, exchange it for a new one and start a new contract or simply hand the keys back and walk away.

Pros:

  • Low payments and large potential deposit contributions
  • Zero percent APR and zero deposit deals available
  • Some deals include servicing, maintenance and insurance

Cons:

  • Interest charges can be higher than with Hire Purchase
  • Exceed the mileage cap or damage the car and face fees
  • You’ll have to save up for the final payment or another deposit 

Important things to remember:

  • With both PCP and HP you don’t legally own the car until you’ve made all of the payments (including the optional final payment for PCP), although your name will be logged on the V5C registration document.
  • As you don’t own the car until you’ve made all payments, any modifications you wish to make to the car before then will require the finance provider’s permission.
  • Most manufacturers will insist that you stick religiously to the official service intervals for your car, having the car serviced at a franchised dealer on time, every time. Fail to do this and you can expect to be stung with additional charges.
  • If you hand the car back at the end of a PCP scheme, the car will be inspected and any damage beyond fair wear and tear is likely to result in you footing an additional repair bill.
  • Hire Purchase is typical more cost-effective than PCP, provided the same contract terms and incentives. Many manufacturers throw in additional incentives on PCP schemes, however, such as large deposit contributions or list price discounts, so make sure that you compare the total cost payable by the customer should you choose to buy a car at the end of a PCP deal or to go for a HP plan.

 

Still not sure which finance method is right for you? These articles may help:
Car finance explained: what is PCP?
Car finance: what is Hire Purchase?
Top cars for £100 per month
How to get a high-end car for a low-end budget
Cars that are cheaper through PCP than paying cash

Still not sure which finance method is right for you? These articles may help:

Car finance explained: what is PCP?

Car finance: what is Hire Purchase?

Top cars for £100 per month

How to get a high-end car for a low-end budget

Cars that are cheaper through PCP than paying cash