Car finance can be baffling at times. Even remembering the initialisms PCP (Personal Contract Purchase) and HP (Hire Purchase) can seem like an arduous task when confronted with a slick salesperson and a flashy motor.
But fret not. If you’re looking for advice on which is best for you, you’ve come to the right place.
Both PCP and HP contracts require a deposit and a series of monthly payments. PCP, however, lets you make the decision about whether to buy the car outright until the end of the contract. Whereas with HP you’re tied into buying the car as soon as you sign up.
Monthly payments for PCP deals are lower because they defer some of the car’s value to an optional final payment at the end. Whereas a HP deal simply splits the total cost of the car into a deposit and the monthly payments.
What is 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 0% APR and no deposit deals (as well as 0% APR no 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.
PCP pros:
> Low payments and large potential deposit contributions
> 0% APR and no deposit deals available
> Some deals include servicing, maintenance and insurance
PCP cons:
> Interest charges can be higher than with HP
> Exceed the mileage cap or damage the car and face fees
> You’ll have to save up for the final payment if you want to buy the car
What is HP?
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% of the price as a deposit, though putting down a bigger upfront payment can sometimes unlock lower – or even 0%– 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.
Should used values for the car 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 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 HP you’ll typically pay less in interest too.
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.
HP pros:
> Less interest charged typically
> Longer-term options make car ownership more affordable
> Very simple with no excess mileage or damage charges
HP 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
How to compare PCP and HP agreements
The short answer here is not to just look at the monthly payment, but at the total cost of ownership.
Figuring out how much money in total you’re going to pay to own the car is the fairest way to compare PCP and HP agreements – assuming you want to own the car.
The small print
> 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.
What’s best for you, HP or PCP?
The first question to ask yourself is, do you actually want to own a car? If you do want to buy, and keep for a significant period of time, HP can be a solid choice.
If you don’t want to commit to owning a car, PCP is the one to go for.
And if you simply want the cheapest monthly payment and don’t want to own a car, leasing is a viable alternative.
Want to find out more about car finance? Take a look at the articles below:
>> Listed: all of the car scrappage schemes
>> Best cars for £100 per month
>> Best cars for £150 per month
>> Best cars for £200 per month
>> Best cars for £300 per month
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