If you’re looking to buy a car on finance, you’ll likely come across PCP (Personal Contract Purchase) and HP (Hire Purchase). Both options let you spread the cost over time but work differently in ownership and flexibility. Understanding these differences is crucial to avoid costly mistakes.
PCP is a finance plan where you pay a deposit followed by monthly instalments for a set period. At the end, you can either return the car, pay a lump sum (balloon payment) to own it, or trade it in for a new one. It’s a flexible option but can come with mileage limits and wear-and-tear charges.
How Does PCP Work?
You start by paying a deposit, usually 10-30% of the car’s price, reducing monthly payments. The finance company calculates your monthly instalments based on the car’s expected depreciation. If you want to keep the car at the end, you must pay the Guaranteed Minimum Future Value (GMFV).
Who is PCP Best For?
PCP suits drivers who like upgrading cars regularly without worrying about depreciation. It’s ideal if you plan to return or swap the car after the agreement. However, if you drive high mileage or want full ownership, PCP might not be the best choice.
What is Hire Purchase (HP)?
HP is a straightforward finance option where you pay for the car in instalments until you own it. There’s no balloon payment at the end, making it different from PCP. Once all payments are made, the car is legally yours.
How Does HP Work?
You pay a deposit, typically 10% of the car’s price, followed by fixed monthly payments. The cost is spread over 2-5 years, depending on the agreement. Unlike PCP, you won’t need to make a final lump sum payment to own the car.
Who is HP Best For?
HP is great for people who want to own their car outright after the finance term. It’s suitable if you plan to keep the vehicle for many years. However, monthly payments are higher than PCP, making it less affordable in the short term.
PCP vs HP: Key Differences
- Ownership: PCP offers an option to buy, while HP ensures ownership at the end.
- Monthly Payments: PCP has lower monthly instalments, whereas HP payments are higher.
- Final Payment: PCP requires a balloon payment to own the car; HP does not.
- Flexibility: PCP allows you to swap, return, or buy, while HP is fixed ownership.
- Mileage Limits: PCP usually has mileage restrictions; HP does not.
What Happens If You Miss Payments?
Missing payments on PCP or HP can lead to repossession, depending on how much you’ve repaid. If you’ve paid less than a third of the total amount, the lender can take the car back immediately. If you’ve paid more, they’ll need a court order to repossess it.
Can You End PCP or HP Early?
Yes, both PCP and HP agreements can be ended early through Voluntary Termination if you’ve paid 50% of the total cost. This includes interest and fees, so check your contract before proceeding. If you haven’t reached 50%, you’ll need to pay the remaining balance to exit.
Final Thoughts
If you want lower monthly payments and flexibility, PCP might be the right choice. If you prefer outright ownership and straightforward costs, HP is better. Consider your financial situation, driving habits, and long-term plans before committing to either option.
Top Tips Before Signing a Finance Deal
- Check Interest Rates: A lower APR means lower overall costs.
- Know Your Budget: Factor in insurance, fuel, and maintenance costs.
- Read the Fine Print: Understand mileage limits, early termination fees, and extra charges.
- Compare Deals: Shop around to find the best finance package for your needs.
Choosing between PCP and HP depends on how you plan to use and pay for your car. Make sure to do your research and understand all the terms before signing any finance agreement. If unsure, seek financial advice to avoid unexpected costs.
For those who believe they were mis-sold PCP finance, check out the PCP Claims, which offers a free-of-cost Mis-sold Car Finance Payout Calculator to see if you’re eligible for a refund.
