By: Lisa Harper

PCP vs HP: Find the Right Car Finance Solution for Your Needs

The most common ways to finance a car are through Personal Contract Purchase (PCP) and Hire Purchase (HP). Both options allow you to spread the cost over a number of months. This makes it more financially viable to get the car you really want. 

But which is the best option for you, HP or PCP? There are a few important things to consider when deciding which option to go with including making sure you can afford the monthly repayments.  

What’s PCP Finance?

PCP is now the most popular method of car financing currently available and is offered by the majority of mainstream manufacturers. PCP is often compared to a mobile phone contract as many people will never own the car but will change the car every few years for the latest model, just like we do with our phones.

In many ways, PCP works the same as any other loan. The big difference is you never pay towards the full cost of the car. The dealer estimates a guaranteed minimum future value (GMFV) of the car. This is based on how long the PCP will last and the mileage limit set. You repay the difference between the GMFV and the original cost of the car, plus interest. 

If you decide you don't want to keep the car at the end of the PCP period you can return it to the dealer. 

If however, you do wish to keep the car at the end of the agreement then you will be required to pay the GMFV. If the car is worth less than the GMFV then the finance company is left to swallow the loss. However, if it is worth more they will benefit from the gains, none of the additional value is passed back to the customer.

The final option available is to return the vehicle to the dealer and negotiate a new PCP deal on a different vehicle. Unlike buying the car outright, when you take out a new agreement you do benefit from any positive equity. So if the car you’ve had on PCP is worth more than the GMFV you can use this additional value towards a deposit on your next deal. As long as you keep the car in good condition and stick to the agreed mileage limit there is a chance the car may be worth more than the GMFV. 

Most PCP offers are taken out over two to four years. As you are only paying a percentage of the vehicle back, the monthly repayments on a PCP deal are usually less than a HP deal.

The amount you pay per month for your PCP deal will depend on the deposit you put down, the term of the agreement, how many miles you intend to cover and the amount of interest charged for the loan. 

Cons of PCP

There are a few considerations to bear in mind before you take out a PCP deal and you’re tied into more terms and conditions than an HP deal. 

When you take out a PCP package a mileage limit per year is set. If you go over the set mileage rate you are liable to pay an additional pence per mileage charge on all additional miles covered. It is therefore important that you are realistic about the number of miles you will be covering. 

If your circumstances change during your contract and you find yourself covering more miles (i.e. a job change means you’re working farther from home) then it is advisable to let the finance company know. Most companies will be willing to re-negotiate the deal to suit your altered circumstances. 

It is also important to keep wear and tear to a minimum, as any wear and tear that is deemed excessive may result in you paying additional charges. 

Most PCP contracts will also require you to maintain regular servicing via a manufacturer approved dealership.

For more information about PCP why not check out our guide to PCP car finance.

HP Car Finance

HP is one of the simplest finance options on offer. The cost of the car is broken down into a deposit and a series of monthly payments plus interest. Once you pay the final payment the car belongs to you and can be kept or sold on. 

Like with PCP the amount you pay each month will depend on the amount of deposit you put down, how many months you choose to spread the cost of the deal over and the interest rate charged. You can alter the monthly contribution depending on the deposit you put down. For example, if you put down a large amount as a deposit the monthly payments will be lower. However, if you only want to put down a small deposit then you will pay more per month.

Some manufacturers have special interest-free HP deals available. These deals can offer great value for money as you only pay the same as the cash price.  

If you do need to end the agreement early due to a change in circumstances it is often possible to pay an early settlement fee. Plus, once you have paid back more than half the finance amount you also get the right to ‘voluntary surrender’ the vehicle back to the finance company. This is part of your statutory rights and will not affect your credit status. 

Find out more about the benefits of HP finance in our comprehensive HP guide.

Cons of HP

HP monthly payments are usually more per month than the same car on a PCP deal. This is because you are paying towards the full amount of the car.

It is worth bearing in mind that you cannot sell on the car until the final payment has been made unless you first gain the finance company’s permission.

The longer the period you take the HP deal out over the more interest you will end up paying.

When should I choose PCP or HP?

PCP is usually best for:

-    People who want the lowest monthly payments

-    People who like to change their car every two to three years

-    People who don’t cover a lot of miles annually

HP is usually best for:

-    People who want to own their vehicle

-    People who cover a lot of miles 

It is important when comparing HP and PCP deals not to just look at the monthly cost, but to work out which is realistically the best option for you. PCP deals often come with generous manufacturer contributions and low-interest rates. However, if you are certain that you want to own the vehicle then HP deals are usually cheaper in the long run.

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