HP and PCP: What Do They Mean?
Financing a car is a great way to drive home an awesome vehicle without spending all or most of your savings on one big purchase. But between hire purchase and personal contract purchase, which type of car finance deal would you choose?
If you’re not yet sure, we’re here to help! We’ll share with you the key differences between these two car finance arrangements so you’ll be better informed when making your decision. 😀
What is car financing?
When you get car financing, it means you’re buying a car by borrowing money from a lender like a car finance company or bank.
To start, you need to pay a deposit, which is usually at least 10% of the price of the car. After that, you will pay back the amount you owe plus interest through monthly instalments. This is something you need to do in a timely manner throughout the term of your contract.
How much you need to pay for the monthly instalments, as well as your options when your contract ends, would differ depending on the car finance type you’ve chosen. There are mainly two types: hire purchase (HP) and personal contract purchase (PCP).
Let’s dive right in and learn more about these car finance deals!
What is Hire Purchase?
HP is a car finance agreement where you pay for a car in monthly instalments whilst, at the same time, you also get to use the car.
Instead of paying everything in cash upfront, you only need to pay a deposit and then a fixed amount every month throughout your agreement with the lender.
How much is the monthly instalment for HP?
Your monthly instalment depends on how much you’ve paid for the deposit, the contract term length, the interest rate, and other fees such as the contract fee and purchase fee, for example.
The amount you pay every month is calculated by dividing the total amount of money borrowed by the number of months of your car finance contract plus interest and other charges, if any.
Usually, HP contracts last from three to five years. For a three-year contract term, you need to make 36 payments in all. Once you’ve reached the end of your contract and have paid off what you owe completely, then you are now the owner of the vehicle.
How much is the deposit for Hire Purchase?
Typically, the minimum deposit is 10% of the car's price. However, bigger deposits and longer terms would result in more affordable monthly payments.
If you choose a seven-year HP contract, for example, the monthly instalment would be lower, but you’ll pay more interest in the long run. You might end up paying more overall than the car's actual value.
How much is the interest for Hire Purchase?
As for the interest, you’ll most likely encounter the term Annual Percentage Rate (APR). This is the charge that includes the interest for the loan and other changes. When comparing different car finance offers from various lenders, it’s a good idea to know their APRs. The lower the APR, the better.
What is Personal Contract Purchase?
PCP is a lot like HP because you’ll also borrow money from a lender to buy a car. You would then pay it back in monthly instalments. However, the difference is that with PCP, you won’t be paying for the full value of the vehicle in instalments.
Is PCP cheaper than HP?
Generally, PCP monthly instalments are lower than most HP agreements. It's because you're paying for the predicted value that the car will lose during the time you'll be using it, and not its full value.
With PCP, you also need to pay a deposit. This deposit will be subtracted from the car's minimum guaranteed future value (MGFV).
For example, if you get a £30,000 car and the lender predicts that it will only be worth £22,000 after three years, you’ll have to pay £8,000 throughout your contract in a 36-month instalment period.
Is the car mine after a PCP contract?
You have the option to own a car in PCP when you pay the optional final payment, usually called "balloon payment." If you'd rather not own the car, you may return it to the lender or use its remaining equity as a deposit for another car for a new PCP contract.
The balloon payment can be quite a significant amount, depending on your car finance agreement. But since it is optional, you don't have to own the car unless you want to. PCP deals are great for drivers who enjoy having a new ride every few years.
When choosing between HP and PCP, it depends a great deal on your preference, needs, and financial situation.
If you only need a car for a couple of years and don’t intend to own it, you can enjoy the lower monthly payments of a PCP car finance deal.
However, if you want to own the car by the end of your contract, an HP agreement might be the better option.
We’d be happy to walk you through what Carmoola has to offer! 👍 🚘