HP or PCP - which type of finance is best for me?

  • Work out whether PCP or Hire Purchase is best for you
  • PCP lets drivers choose whether to buy the car or return it
  • With HP you commit to owning the car

Car finance can be baffling at times. After all, there's a reason why car adverts on the radio leave the finance terms right until the end - and even then, they're read at the speed of sound.

The two most common forms of car finance are Personal Contract Purchase (PCP) and Hire Purchase (HP). Both allow you to pay an upfront deposit. And both require a set of fixed monthly instalments. The end of the contract is where things change.

PCP schemes leave you to make your decision about buying the car until the end of the agreement. While with a HP contract, you're tied into buying the car.

The monthly payment for HP deals tends to be higher. This is because the total cost of the car is split between a deposit and the monthly payments. PCP deals defer some of the car's value into an optional final payment. This is the money you have to stump up at the end of a PCP deal to buy the car. If you don't want to pay it, you can hand the car back.

HP or PCP? Which for me?

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.

Virtual showroom

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 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 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.

How to buy a new car online

HP pros:

> Less interest charged generally
> 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

Peugeot 308 SW

How do I 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.

If you don't want to commit to owning a car, PCP is the one to go for. And if you're completely unfussed about owning a car, leasing is a viable alternative.

Important things about HP and PCP

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.

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

Want to find out more about car finance? Take a look at the articles below:

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