PCP Vs HP
Are you looking to get your next car using a finance deal but haven’t decided which option is the best? Our guide is here to lay out all you need to know about the differences between Personal Contract Purchase (PCP) and Hire Purchase (HP) agreements.
Read on to find out which method of car finance is best for you.
What is PCP car finance?
PCP is just one alternative to financing your car, instead of buying the vehicle outright. On the face of it, PCP can look like quite a complicated process, but it’s really quite simple. It consists of three major payments:
- Monthly payments
- Balloon payment (optional)
The deposit is fairly self-explanatory, you will pay a lump sum prior to driving the vehicle that will usually be around 10% of the total value of the car. But you can choose how much or how little you wish to pay upfront for the car. Your monthly payments then depend on the full amount of the car minus the deposit and balloon payment.
A balloon payment is what the dealer thinks the car will be worth at the end of the contract, also known as the Guaranteed Minimum Future Value (GMFV). The GMFV will be pre-agreed at the start of your contract. If you subtract the GMFV from the total value of the car, as well as your deposit, you get the loan value. Once that is clear, you will make monthly payments to cover the loan.
At the end of the contract, you can either pay the balloon payment and keep the car, return the car and begin a new contract on a new one, or simply return the car and walk away.
What is HP?
Hire Purchase (HP) follows the same basic principle but payments are structured slightly differently. A deposit of around 10% will be required, before monthly payments are made to cover the value of the car. At the end of the contract you will have paid off the value of the car and can own it outright for a small administration fee, often referred to as the ‘option to purchase’ fee (usually around £100).
What is the difference between PCP and HP finance?
Where PCP and HP significantly differ is when it comes to making the final payment.
PCP finance options include a balloon payment that can be made to buy the car at the end of the term, whereas a HP will just include the option to purchase fee. A hire purchase loan will pay off the entire value of the car whereas a PCP loan will only pay off the value of the car up until the GMFV. Because of this, you can expect monthly payments on a HP contract to be slightly higher.
PCP or HP: which is the best option for me?
So which is the best option for you, PCP or HP finance? Well it depends on a number of factors, including your budget, and your intentions with the car at the end of the contract.
We have broken down the specifics and compared them to give you a clearer picture of which finance option will suit you better.
Need a side-by-side comparison of different car finance options to help you make your mind up? Check out our guide showing you the different finance methods to help you decide which one is best.
As we previously touched on, the payment structures of both PCP and HP are slightly different. Take a £20,000 Vauxhall Corsa financed over three years for example.
Deposit: With both PCP and HP you will pay a deposit of around 10%. These can differ slightly depending on your dealer, and you can pay a larger deposit if you would prefer, bringing your monthly costs down. Using the Vauxhall Corsa example, your 10% deposit will be £2,000.
Balloon Payment (GMFV): Before starting the PCP contract, it has been agreed that the GMFV of the Corsa is £8,000. At the end of the three years you can decide to either pay that sum and buy the car outright, or walk away without paying any additional fees.
Worth noting that if by the time you come to the end of your deal, your car is valued higher than the GMFV, you will have something called positive equity. You can use that positive equity towards a new PCP deal, either with the same provider or a new dealer. So if the Vauxhall Corsa is actually valued at £9,500 after the three years, you have £1,500 to put towards the deposit on a new deal.
With HP there is no balloon payment, and buying the Corsa outright will cost you an administration fee, often between £100-£200.
Monthly payments: So with an £8,000 GMFV confirmed, your PCP loan is now £10,000 (Value of the car – Deposit and GMFV). Over the duration of the deal, you will make monthly payments of £277.78 (£10,000 / 36 months), + % interest, to cover the loan.
As HP agreements do not include a balloon payment, you will pay the full £18,000 (Value of the car – Deposit) off over the three years and make monthly payments of £500 + % interest.
% interest: Interest paid on a finance deal is where it gets slightly more complicated. We will try and keep it simple here, but for more information on car finance interest, check out our other guide to how car finance works.
PCP payment structure
HP payment structure
Typically, interest rates range between 4-8% depending on the size of the loan and your credit score. You can still buy a car on finance with bad credit – but bad credit scores can increase the rate of interest as high as 50%. Some creditors will offer 0% interest, but be cautious. It is likely that the provider will try and cover that cost somewhere else (i.e. a bigger deposit or higher monthly payments etc.)
The difference (or similarity depending how you view it) is that with both PCP and HP you will pay interest on the total value of the car minus the deposit. So for PCP this will include the balloon payment.
Using our Vauxhall Corsa example, you will pay % interest on the full £18,000 regardless of which finance option you decide to take out.
Ownership does not differ between PCP and HP finance contracts. For both options, the finance provider owns the vehicle for the duration of the deal, until you pay the fee/balloon payment at the end of your contract. For PCP deals, until you decide to buy the car and pay the balloon payment, you are only hiring it. The same goes for HP agreements, until you pay the option to purchase fee, you are only hiring the vehicle.
Even though you don’t actually own the vehicle until you decide to purchase the car, you are still required to insure the vehicle yourself. Unless stated by your provider, both PCP and HP options won’t include insurance. It is always worth checking with your provider beforehand though as in some rare cases insurance may be included.
All forms of car finance will require you to take out fully comprehensive cover if it does not already come with insurance. This is because the car isn’t actually owned by you during the length of the agreement, so you will need to have it fully covered.
GAP insurance is also your responsibility should you want to take out a policy. This covers you if you have an accident whilst owing more on your financed car than it is currently worth. You can find more information on insurance and GAP insurance in our other useful guides.
Maintenance is another cost that you will have to consider when you take out a PCP or HP loan. Because of the possibility of ownership after the duration of your deal, maintenance considerations are slightly different between the two methods of finance.
With PCP, it is possible that you will hand the car back at the end of the agreement. Therefore most providers will require you to use one of their approved garages for the GMFV to remain valid.
HP is more flexible. Because you will have paid off the full value of the vehicle, it is likely that you will pay the admin fee and keep the car. Therefore providers are less concerned with the garages you use to service the car.
As is the case with insurance, it is worth discussing this with your provider beforehand as some will offer different options.
At the end of your contract, a PCP deal offers more flexibility. With a PCP you have three options:
- Pay the balloon payment and own the car outright
- Use any equity you may have towards a new PCP deal on a different car
- Hand the car back and walk away
Hire purchases are not as flexible as this. You can either pay the Option to Purchase fee and own the car from there on, or you can decide not to pay that fee and hand the car back. However, because you have paid off the full value of the car, it is unlikely you will hand it back. More often than not, the car will be yours.
Because of your likelihood of buying the car post-HP, you won’t face any restrictions on mileage limits. Whereas with PCP, you will have to select an annual mileage cap, and extra costs will occur if that cap is exceeded if/when you come to hand the car back.
Voluntary termination is an option on both PCP and HP deals. Under the Consumer Credit Act 1974, if you have paid off 50% or more of the total contract value, you are legally allowed to cancel your contract early. Crucially, the total contract value includes balloon payments, interest, and other fees.
The good news is that if you have not yet paid 50% of the contract, you can still get out of the contract. Instead of waiting until you have paid over half of the value of the agreement, you can immediately cover the difference and terminate the contract. So if you have paid £7,000 of your £18,000 loan, you can pay the additional £2,000 straight away and cancel the contract there and then.
Is PCP right for me?
So how do you tell which option is the right one for you? Our quick summary will help you decide.
PCP finance deals will likely suit you if you are looking for the following:
- Smaller monthly payments with larger purchase fee
- A contract that offers more flexibility once the deal has finished
- Not having to worry about depreciation as the GFV is fixed prior to the agreement
- Regularly change or upgrade cars after each contract
Is HP right for me?
A HP finance deal is possibly better suited to you if you are after the following:
- Larger monthly payments that eliminate final balloon payment
- A car that you will own after the initial hire period
- Changing cars less regularly and getting more use out of each vehicle
- Less restrictions on mileage
Other available finance options
PCP and HP agreements are not the only finance options available. Buying the car outright or taking out a bank loan are two other ways of financing your new car. As is Personal Contract Hire (PCH), or leasing, as it is more commonly known.
If you want to know more about leasing or car finance, cehck out our handy guides.
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