Hire Purchase or Personal Contract Purchase?

You probably have a dream car in mind that you'd like to buy. Now all that's left to do is get the keys. For many, that involves getting car finance, but which option should you go for? Two options on the table are personal hire purchase and a contract purchase. At first, they might seem similar. But there are differences, and we've got what sets them apart in this guide. 

But First ... How Does Car Finance Work?

Car finance allows you to spread the cost of a vehicle over time, making a large expense manageable through monthly payments. There's often an upfront cost, like an initial rental or deposit, but zero-deposit options exist, too.

Upon approval, the loan is paid back over a period (usually 12 to 48 months) that you and the lender agree upon. Monthly payments depend on factors like deposit size, contract length, and a fixed interest rate. Comparing annual percentage rates (APR) can help find the most affordable deal. Now, let's explore hire purchase and personal contract purchase options.

What is Hire Purchase?

Hire purchase car finance calculates the cost of a vehicle so it can be divided by the number of months agreed upon in your contract. When you pay a deposit, the amount will be subtracted from the overall cost of the car and what you to borrow. The bigger the deposit, the lower the monthly payments. 

You can get hire purchase deals for brand-new vehicles and for secondhand cars. With hire-purchase car finance, once you’re done paying off the loan, the car is yours. You don’t have to pay for anything else. In that sense, it's a bit like a mortgage. 

Hire purchase secured against the vehicle, meaning the car acts as collateral in case you miss payments. If you stops paying altogether, the lender can repossess the vehicle to cover the cost. That’s why it’s important to always pay on time. 

Hire purchase is the best option to finance a car if you want to own the vehicle outright, but you want the cost to be spread over a set number of months to make it more affordable for you. This is a great option for those who know they really want to own the car by the end of their contract term. 

What is Personal Contract Purchase

If you’re looking for more flexibility when it comes to car finance, maybe a personal contract purchase deal is better for you. The monthly repayments are lower than a hire-purchase deal since you’re not paying for the full price of the vehicle. Instead, what you pay off is the car’s predicted depreciation for the duration of your contract.

Just like a hire purchase agreement, you need a deposit if you want lower monthly payments. By the end of your contract, you have the option to return the car or buy the car by paying an optional final payment. If you want to return the vehicle, you won’t have to pay anything else unless the car has incurred some damage or it has exceeded the pre-agreed mileage limits. 

Personal contract purchase is better for car buyers who aren't sure whether they finally want to own the vehicle, or maybe only need the car for a few years. At the end of your contract term, you can choose to pay the final balloon payment so the car will be yours. If you’ve decided against keeping, then you only have to return it to the lender. 

What Are the Differences Between Hire Purchase and Personal Contract Purchase?

Hire Purchase

  • You're on a direct path to owning the car once all payments are made.
  • Monthly payments are calculated based on the total cost of the vehicle.
  • Less flexibility at the end of the term as the car is yours once you've paid in full

Personal Contract Purchase

  • Lower monthly payments, calculated based on the vehicle's depreciation.
  • At the end of the term, you have the flexibility to either return the car, pay the final balloon payment to own it, or trade it in for a new model.
  • Ideal for those who enjoy frequently changing their car or are unsure about long-term commitment to a specific vehicle.

Hire Purchase or Personal Contract Purchase: Which One is Best?

Choosing between hire purchase and personal contract purchase ultimately depends on your needs and car-owning aspirations. If outright ownership at the end of the term is your goal, hire purchase could be your ideal route. It will probably cost a little more than personal contract purchase, but the route to outright ownership is more straightforward. 

However, anyone looking for flexibility with lower monthly payments and the option to return, keep or trade the car at the end of the term may prefer personal contract purchase. The balloon payment at the end means you can still own the car outright, but there's more flexibility when it comes to giving back the keys. 

What's More Popular: Hire Purchase or Personal Contract Purchase?

In the UK, Personal Contract Purchase (PCP) is the most popular car finance type, accounting for about 90% of all private new car purchases. That's not to say hire purchase isn't also a sought-after type of vehicle financing. Both types have their pros and cons (as noted above) and can be used for brand-new cars and second-hand vehicles. 

Hire or Personal?

Whether you choose a hire purchase or a personal contract purchase, make sure that it fits your financial situation, and think about whether you want to own the car or have the flexibility to return it at the end of your contract. 

Want to learn more about how car finance works? You can use the Carmoola car finance calculator to get an idea of how much your monthly payments will be when you borrow a certain amount. Remember that this will only be an estimate, and the actual amount might be different. Nonetheless, it will help you in budgeting your finances. 

Here's what you need to know about how Carmoola can help you buy your dream car! 🚗