HP or PCP: Which Car Finance Option Is Best for You?
For the majority of people, buying a car will mean signing up for a finance agreement that allows you to pay for the vehicle in monthly instalments. Hire purchase (HP) and personal contract purchase (PCP) are the two most common types of car financing plans, and they each have their own benefits. This guide will help you to decide on the best option for you.
What is a hire purchase (HP) agreement?
Financing a car can seem a little confusing and intimidating at first. But if you think of it as essentially borrowing money from a dealership or its finance partners to pay for a car, you shouldn’t go too far wrong.
Firstly, let’s take a look at HPs. A hire purchase agreement involves you paying for a number of things, including the cost of the car. These include:
- Price of the car: With HP, you’re signing up to pay the full price of the car to your dealer’s finance partner over a set period of time. This payment term is usually 12, 24, 36 or 48 months.
- Interest: As you pay off the car over time, you’ll also have to pay interest to cover the costs of the loan. This will be presented to you as APR (annual percentage rate), indicating how much extra you’ll be paying per year, on top of the price of the car. Some deals for new or used cars may offer to waive this interest entirely as an incentive to buy.
- Deposit: HP will also involve paying a deposit up front, which is usually around 10% of the total price of the car. This goes towards offsetting the cost, so once you’ve put this deposit down, you’ll owe the remaining 90% of the price (plus any interest).
At the end of the payment period, once you’ve paid all your monthly instalments, you will have fully paid the price of the car, as well as interest. The car will now belong to you.
What is a personal contract purchase (PCP) agreement?
A personal contract purchase agreement also involves you paying off the cost of the car in monthly instalments, along with an initial deposit. Where it differs from HP is the consideration of the car’s guaranteed minimum future value (GMFV).
GMFV is the amount that will be outstanding at the end of the PCP agreement. You’re essentially borrowing the difference between the car’s current price (minus your deposit) and the car’s depreciated value sometime in the future, after you’ve been using it for however long your finance plan lasts. This means that the car still belongs to the dealership at the end of the payment term
When you’ve reached the end of your agreement, you can choose to cover the GMFV with a final “balloon payment”, which will allow you to take ownership of the car. Alternatively, you can just hand the car back to the dealership. Another option is to use the car as partial equity towards another financial agreement or cash purchase for a different car.
Which plan is best for you?
What kind of finance agreement suits you best will depend on your future plans for car ownership, as well as your financial situation. While PCP usually allows for cheaper monthly instalments, HP allows you to own the car outright at the end of the agreement without a large final payment.
If you’re on a relatively tight budget, PCP might be the best plan for you. It’s also good if you don’t want to fully commit to a car and you’re likely to change to a different model in a few years’ time.
With HP, you have the security and simplicity of paying a fixed amount, and knowing that no more payments will be due at the end of your agreement. You also don’t have to worry about the car’s future value. If you’re certain that you’ve found the right car for you, this could be the way to go.
New cars vs. used cars
PCP generally entails paying less per month towards the cost of your car compared to HP. However, it’s usually only offered with new or nearly-new cars, which tend to be more expensive than used models. With older vehicles that have miles on the clock and some signs of wear and tear, it’s more difficult for the dealership to estimate the car’s GMFV, so they’re less likely to offer a PCP agreement.
This means that HP could work out to be the cheapest option for you, if your budget only stretches to the price of a used car that’s already lost some of its original value.
What other deals are available?
Buying a car is a significant purchase that can be tough to commit to, and dealerships will often try to encourage customers with different incentives. There are a few extras that may be offered with your finance plan, whether it’s an HP or PCP agreement. The most common of these are:
- Deposit contribution: This is essentially a subsidy provided by the dealership. They pay a certain amount towards your deposit on top of what you pay. This means that your monthly instalments will be lower.
- 0% finance: Usually offered as an alternative to a deposit contribution, but occasionally alongside it, 0% finance means that you won’t pay any interest on your HP or PCP agreement. This could apply for the whole payment term, or just part of it. If you’re buying a particularly expensive car, or you’re paying over a long period of time, 0% finance could end up saving you a lot of money.
Both HP and PCP will help you to spread out the cost of a car over time, which really opens up more options if you’re not in a position to pay cash. They each have their benefits and drawbacks, and hopefully this guide has made these a little clearer. Remember to get as much information as possible from your dealership before you sign up for a financing agreement. For more advice on car buying, check out our other handy finance guides.