HP or PCP: Which Car Finance Option Is Best for You?

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:

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.

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.

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.

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.

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:

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.