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What's The Difference Between HP vs PCP! Car Finance Explained

Hire purchase vs personal contract purchase – what’s the difference? It’s a question posed by many car buyers, and we’re here to help. In this guide, we’ll look at the differences between PCP and HP loans, what that means for you, and provide some information so you can make the right decision about the best car finance for your next purchase.

Keen for a video? Check out Kathryn explaining all you need to know about PCP vs HP 👇

 

So, what's the main difference in HP vs PCP finance?

PCP

With PCP, you only borrow a proportion of the cost of the car. You'll agree to fixed monthly repayments over a set period of time (usually 2 or 3 years), which are calculated based on the 'Guaranteed Minimum Future Value' of the car at the end of the contract. Once the contract comes to an end, you can choose to pay the GMFV (often referred to as a balloon payment), or you can hand the car back.

HP

For many, an HP agreement is more simple. It‘s like a traditional loan, and you'll pay back the total cost of the car over a set period of time (this can be from 1 to 5 years, or sometimes longer). It’s a bit like a mortgage on a house, in that you pay a deposit and then make monthly payments until the loan is paid off. 

If you only remember one thing from this article it should be this: with an HP agreement, you own the car at the end. With a PCP agreement, you don't own the car, unless you pay the final balloon payment.

A closer look at PCP

PCP, (otherwise known as Personal Contract Purchase) often looks appealing, as the monthly payments are often lower than HP. PCPs are more common for new cars, or nearly new cars, and you can find some great deals. You'll pay monthly payments to access a new car, and then give it back when those payments stop, or pay the remaining balloon payment and keep the car.

Many car buyers would never dream of being able to afford a brand new car, but PCP has made this an affordable option for so many people, that almost 91% of new car buyers opt for PCP financing. And don't forget, with a new car you'll also get other perks such as a warranty against faults and issues, so no need to worry about costly repairs. 

PCPs were first introduced into the UK in 1992 by Ford. They were immediately popular, and many other car manufacturers quickly jumped on the bandwagon, keen to stay competitive. 

Key features of PCP

To make it super clear, we thought it best to break down the components of a PCP:

  • You'll pay an upfront deposit
  • Sometimes the dealer will also contribute to the deposit
  • Decide on a term for the agreement, usually a couple of years
  • The dealer will work out the GMFV for the car after the term
  • The dealer will set the interest rate based on their assessment of your creditworthiness (% APR)
  • This will determine the monthly payment amount
  • And also there's a final balloon payment (optional, if you want to keep the car)

Here's an example. You're buying a car that costs £25,000. You'd like to contribute £2,000 to the deposit, and there's a dealer offer where they'll contribute £1,000 too! You're going to take the PCP over 3 years, and the GMFV of the car is £12,000. This means that the amount you'll be financing is £10,000 over 3 years, and the APR is 8%. You'll pay 36 monthly payments of £393. At the end of the term, if you'd like to buy the car outright, you'll pay the GMFV of £12,000.

If you don't keep the car

In this example, you'll be paying a total of £16,148 and then you'll give it back after the 3 year term.

(36 months x £393, plus £2,000 deposit

If you buy the car at the end of the term

In this example, the total cost will be £28,148, but of course you'll have a car worth around £12,000

(36 months x £393, plus £2,000 deposit, plus £12,000 balloon payment)

As with all finance agreements, any deal you may be offered will be subject to status and eligibility. The example above is for illustration purposes only.

Are repairs covered in my PCP agreement?

Most PCP cars require you to pay for repairs unless you took out extra warranties when signing the contract on the vehicle. Some dealerships and manufacturers offer extras to repair your car should you encounter issues.

These usually include rim protection on your wheels and windscreen protection. However, there may be a manufacturer's warranty in place that covers repairs for a specific amount of time. Each dealership and manufacturer differs, so it's best to check with them directly. 

Should I buy the car at the end of my PCP agreement?

Really, this one's up to you! There's no 'one size fits all' here, but we can tell you where to look. You need to work out the real value of the car when you get to the end of the agreement! 

To make this a little clearer, in our example above, the balloon payment is £12,000. However, if the car is incredibly popular, a rarer model, in good condition or has particularly low mileage, it may be worth more  than the dealer expected. If this is the case, buy the car! You may be able to sell it privately for more than £12,000, and make some cash!

However, if the opposite has happened and the car is actually worth less than £12,000 on the open market, the best thing could be just to give it back. Often the dealer will want to get you straight onto another PCP, so whip out your best negotiating skills and push them for a great deal. 

What are the advantages of PCP?

The main advantages of PCP are the lower monthly repayments. This gives many consumers the flexibility to spend their hard earned cash on other things. Another great advantage is the affordable option to have a brand new car... and show it off to your friends of course! New cars bring many great advantages of their own, often more fuel efficient, less CO2 emissions, have less issues and are under warranty anyway if something were to go wrong. Also, if you don't love the car by the end of the agreement, just give it back and jump onto a new PCP agreement, and a new shiny car!

With any finance agreement, there are risks to consider too. If you cannot afford to keep up with the repayments then there is a risk that the vehicle may be repossessed. Your credit score may also be affected, and this could impact your chances of taking other finance products in the future, or the rate at which you can borrow money.

A closer look at HP

HP, or Hire Purchase agreement is another option you may want to consider, and has been around for as long as cars have been sold! Some people would say it's a much less complicated set up, essentially spreading the cost of your car over a set period of time. You'll find that the repayment amount is higher on HP agreements, but if you can afford to do it, then you'll end the agreement with an asset worth several thousand pounds, and the option to part exchange your car when you get a new one!

At the end of your agreement, you won't find a large balloon payment, but you will need to pay the Option to Purchase fee, which essentially transfers legal ownership of the car to you. For some lenders, this could be around £100, however with Carmoola we keep it nice and simple at just £1 😊

Key features of HP

Here are the components of HP agreements:

  • You can pay an upfront deposit payment (but some lenders offer zero deposit options)
  • Decide on a term for the agreement, usually a couple of years
  • There will be an interest rate (% APR)
  • This will determine the monthly payment amount

HP can be more simple to understand. Let's look at it in terms of the same car, costing £25,000, and with a £2,000 deposit from you. On this HP agreement, we'll have an 8% APR, and we'll take the loan over 3 years. For this agreement, you'll pay 36 monthly payments of £721, and at the end of the term you own the car outright. Not all loans are set over 3 years, you can read more here about the different terms of car finance loans.

How much am I paying in total?

For an HP agreement, it's much more simple. You'll pay the 36 payments and then you own the car, that's it! So in total, the car will cost you £27,956, but don't forget that you'll also end up owning an asset worth several thousand.

(36 months x £721, plus £2,000 deposit)

Are repairs covered in my HP agreement?

Again, much like PCP, hire purchase agreements don't tend to safeguard you against damage to the vehicle other than an initial warranty – and that may even be limited. 

The lease won't include regular services, and you may even have to take it to a manufacturer-approved garage. As with PCP, it's important to look at the fine print with the lender as each agreement could differ slightly in terms of repairs and maintenance. 

What are the advantages of HP?

HP can seem like the responsible option. Yes, you're committing to a higher monthly payment, but it's an investment for the future. An investment in an asset that will be worth a couple of thousand pounds, and will help you as a deposit towards a new car if you wish to part-exchange it. It's a much simpler agreement to understand, and offers less chance to be caught out on confusing contract jargon - something we hate here at Carmoola!

Personal contract plan vs hire purchase

So, we reckon you've got a pretty good understanding when it comes to a personal contract plan vs hire purchase agreement. And hopefully, you can make an informed decision about the best way to get the keys to your dream car. 

If you feel well informed and think this article could help other potential car buyers, give it a share and spread the Carmoola love ❤️

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