PCP vs HP - Choose The Best Type of Car Finance For You

car finance

Deciding between a Personal Contract Purchase (PCP) and a Hire Purchase (HP) for your car finance?

Continue reading to arm yourself with the insights to help you choose the best choice for your financial circumstances and vehicle ownership goals.

Whether you’re considering the flexibility of PCP or HP ownership, we’ve got you covered.


What’s The Difference Between HP and PCP?

HP or PCP are car finance options that help you with your vehicle purchases. The main difference between PCP vs HP lies in the payment structure and ownership outcomes.

HP is a direct finance option where you pay monthly instalments towards the total cost of the car, eventually owning it outright.

In contrast, PCP finance offers lower monthly payments with a significant final payment if you decide to keep the vehicle.

Both have their merits, depending on your financial situation and how you prefer to manage car ownership.

Read on to discover more about personal contract purchase vs hire purchase.


What is PCP Car Finance?

PCP is a car finance option that allows you to drive a new car with lower monthly payments than HP agreements.

With PCP, you pay a deposit and monthly payments for a set term. At the end of this term, you can either pay a final balloon payment to own the car, hand the car back, or trade the car in for a new model.

For example, on a Toyota Aygo priced at £12,000, you might pay a £2,000 deposit, followed by monthly payments of £150 for 3 years. If you wish to keep the car, a final payment of £4,000 would be required at the end of the term.

This structure offers flexibility and affordability, making it a preferred choice for many drivers in the UK.

Suggested Reading: Mis-sold Personal Contract Plans (PCPs) – The FCA review


Pros and Cons of PCP

PCP car finance agreements are a popular choice for drivers looking for flexibility and lower monthly payments. But like any financial product, it comes with its own set of advantages and disadvantages.

Benefits of PCP

  1. Lower monthly payments: Compared to HP agreements, PCP offers lower monthly payments. Thus, making it easier to afford a newer or higher-spec car.

  2. Flexibility at the end of your finance term: At the end of the PCP agreement, you have the option to give the car back, keep it by paying the final balloon payment, or trade the car for a new one. This offers you flexibility based on your financial situation and needs.

  3. Access to newer cars: PCP makes it possible to drive a different car every few years. If you don’t want to keep the car, then PCP might be a good option for you.

What Are The Negatives of PCP?

  1. Mileage restrictions: PCP contracts come with annual mileage limits. Exceeding these limits can incur costly charges.

  2. Wear and tear charges: Upon returning the car, it must be in good condition to avoid additional charges.

  3. Ownership costs: While monthly payments are lower, opting to purchase the car at the end of the term with the final balloon payment can make the total cost of ownership higher.

For those considering PCP, or who might have concerns about their agreement, understanding the risks of PCP agreements can provide valuable insights and potential recourse options.

Learn More About Us: Mis-Sold Car Finance Solicitors


What is Hire Purchase?

HP is a car finance option where you pay for the car in instalments over an agreed length of the contract until the total cost is paid off, at which point you become the owner of the vehicle. Unlike PCP, there is no balloon payment at the end.

For example, you are purchasing a Toyota Aygo worth £12,000 on HP. This car finance option might involve paying a £2,000 deposit, followed by monthly payments of £278 over 3 years (36 months) at an interest rate of 4.9%.

This approach means that once all payments are made, the car is yours, with no final lump sum required. HP is favoured by those who prefer to buy the car outright without the balloon payments.


Pros and Cons of HP Contracts

Understanding the advantages and drawbacks of HP contracts can help you determine if this option aligns with your financial goals and vehicle needs.

Advantages of HP

  1. Simple to Understand: HP contracts are straightforward, with fixed monthly payments that lead to ownership of the car at the end of the term.

  2. No Mileage Restrictions: Unlike PCP, HP agreements do not impose mileage limits, making them ideal for high-mileage drivers.

  3. Flexibility in Payment: Some HP contracts allow for early repayment or overpayments. This flexibility can reduce the interest paid over time.

  4. Ownership Assurance: At the end of the payment term, you become the legal owner of the car.

  5. Accessible to a Wide Range of Buyers: HP can be more accessible to people with varying credit scores, as the car acts as collateral for the loan.

Drawbacks of HP

  1. Higher Monthly Payments: Monthly payments on HP are higher than PCP for the same car because you’re paying off the entire value of the car.

  2. Commitment to Full Ownership: HP requires a commitment to purchase the vehicle outright. This might not be suitable for those who prefer changing cars frequently.

  3. Interest Rates: The interest rates on HP agreements can increase the total cost of the car, especially compared to some cash purchase deals.

  4. Depreciation Risk: Since you own the car at the end of the agreement, you bear the full risk of its depreciation.


Cost Comparison of a Car With a Personal Contract Purchase vs Hire Purchase Deal

To illustrate the cost difference between PCP vs HP deals, let’s consider financing a car worth £20,000 for 3 years, with a £2,000 deposit and an interest rate of 4.9%.

PCP Finance Deal:

  • Deposit: £2,000

  • Monthly Payment: £250 for 36 months

  • Final Balloon Payment (to own the car): £8,000

  • Total Cost (excluding balloon payment): £11,000

  • Total Cost (including balloon payment): £19,000

HP Finance Deal:

  • Deposit: £2,000

  • Monthly Payment: £540 for 36 months

  • Total Cost: £21,440

In this scenario, the total cost of the PCP deal is lower if you choose not to pay the balloon payment and return the car. However, to own the car outright, the total expenditure under the PCP agreement is less than the HP deal due to the structured balloon payment. 

HP results in higher monthly payments but leads to ownership without a large final payment, whereas PCP offers lower monthly payments with a substantial final payment to own the car.


Frequently Asked Questions About PCP and HP Finance

How much will I have to pay in my balloon payment at the end of a PCP contract?

The balloon payment, also known as the Guaranteed Future Value (GFV), depends on the car’s estimated value at the end of your contract. For instance, if you finance a car with a starting price of £20,000 and the GFV is set at £8,000, that’s the amount you’d need to pay if you decide to keep the car.

Is PCP better than buying outright?

PCP can be more appealing than buying outright if you prefer lower monthly payments and the flexibility to change cars often. This could be better if you are uncertain of full ownership from the start. On the other hand, buying outright is wiser if you want to avoid interest charges and have the financial means to purchase the car without affecting your cash flow negatively.

Is PCP worth the money?

PCP is worth considering if you value flexibility and the option to drive newer models more frequently. It allows you to drive a more expensive car than you might otherwise afford through outright purchase. However, it may cost more in the long run if you choose to buy the car at the end of the agreement.

What happens if my car is worth more than the balloon payment?

If your car is worth more than the balloon payment at the end of the PCP term, you can use your equity as a deposit towards your next car if you choose to trade it in. This situation can be financially advantageous.

Do you own the car after HP finance?

Yes, once you’ve made all the payments on an HP finance agreement, including the final payment, you own the car outright. There are no balloon payments at the end, unlike with PCP.

Is it worth getting a car on finance?

Yes, getting a car on finance can be worth it if you cannot afford to buy a car outright or prefer not to deplete your savings. It allows you to spread the cost over time but comes with interest charges. Whether it’s worth it depends on your financial situation and preferences.

Is hire purchase a good idea?

Hire Purchase is a good idea if you’re certain you want to own the car at the end of the agreement and prefer a straightforward path to ownership. It’s less flexible than PCP but provides a clear, manageable route to buying your car.


The Verdict – Should You Choose a HP or PCP Deal?

Choosing between an HP or PCP deal depends on your financial situation, how you use your car, and your long-term intentions.

HP is better for those who prefer a simple path to outright ownership, don’t mind higher monthly payments, and plan to keep the car for a long time.

On the other hand, PCP is ideal for drivers who desire lower monthly payments, like the flexibility of changing cars regularly, and may not be sure about owning the car at the end of the agreement.

Concerned about car finance mis-selling? Sandstone Legal offers expert legal advice on car finance agreements and ensures your rights are protected. If you suspect you’ve been mis-sold PCP or HP car finance, visit us at Sandstone Legal for guidance and support tailored to your unique situation.

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