HP car finance verses personal contract hire (PCH)

When you're thinking about financing a used car, but don’t have the cash to buy outright, you have several options to consider. This guide compares HP car finance with personal contract hire (PCH) to help you understand the key differences and decide which might work best for you.

First of all, think about your end goal. If you want to own the car outright by the end of your agreement, HP car finance might be the better option. On the other hand, if you’d prefer the flexibility to change your car every few years, leasing through PCH may suit you better. Knowing your priorities will help you make the best choice. 

HP car finance: How it works

Hire purchase (HP) car finance is one of the most straightforward car finance options. 

It also gives you the flexibility to finance used cars (as well as new cars), which can give you more options when you're looking to purchase a vehicle. 

Getting a second hand car rather than buying new means you are not restricted by manufacturer waiting times or delays. 

You avoid the immediate drop in value that happens when driving a new car for the first time, and in many cases, you can take your car home the same day.

Your first step will be to get an idea of what you can borrow and whether the associated monthly costs are affordable, as this will tell you how much you can comfortably spend on your car.

An HP car finance lender can tell you this information, or you could go to a broker for help, but they may charge you for this service.

Choosing the car

If your car finance application is approved, you can start looking for the specific car you want to buy. 

You can select any car from a dealership, provided it meets the lender's criteria. Most lenders have specific requirements and often work with a network of trusted dealerships nationwide, so it's helpful to start your search within that network to find your ideal car.

If you're unsure about which car to buy, you can check out our guide “Choosing a car: everything you need to know before you buy”.

Deposit

When you enter a hire purchase agreement, you generally pay an initial deposit, often a percentage of the car’s total price. However, some lenders also offer zero deposit car finance options. 

Because some lenders require a deposit, it's a good idea to check this with your lender before applying. For example, AutoMoney Motor Finance provides both deposit and zero deposit options.

Paying a deposit typically means your monthly payments will be lower, compared to a deal where you do not pay a deposit and borrow over the same period.  This is because paying some of your own money may reduce the lender’s risk and lowers the amount you need to finance. 

If you choose a no deposit option, your monthly payments will be higher since you’re financing the full cost of the car. Some customers may still choose to pay a deposit, even if it’s optional, to reduce their monthly repayments.

Fixed monthly payments

With HP car finance, your monthly payments are fixed, providing certainty about the amount due each month without any risk of increase. Payments are structured as instalments—a fixed amount payable on the same date each month—spread across the term of your agreement.

Most lenders include a documentation or admin fee in the first payment. Additionally, an ‘option to purchase’ fee is typically added to the final payment, meaning your first and last payments will be slightly higher than your regular monthly instalments.

Interest rates

The interest rate on your HP car finance will depend on factors like your credit score and the lender’s terms. 

A higher credit score often results in a lower interest rate, which can save you money over the duration of the agreement. 

On the other hand, if your credit score is lower, you may face a higher interest rate, increasing both your total repayment amount and monthly payments. 

When applying for car finance it’s a good idea to shop around and compare interest rates from different lenders. This can help you find the best deal that suits your financial situation. 

Car ownership 

Once your Hire purchase agreement ends and you’ve made the final payment, including the option to purchase fee, you will own the car outright. 

Unlike other car finance options, there is no large ‘balloon payment’ due at the end of the term, nor is there a requirement to return the vehicle. This makes HP a great choice for customers who want to own the car outright, once the finance agreement ends.

Under the Consumer Credit Act, you also have the right to settle your HP agreement early, either partially or in full, with a rebate on interest for the remaining term. While early settlement is allowed, some lenders may have specific terms for calculating rebates, so it’s beneficial to review your agreement for details.

Benefits of HP car finance

Choosing hire purchase for your car finance comes with some benefits, but there are also important things to consider. Here’s a list of the key advantages and factors to keep in mind when choosing hire purchase:

Lower final payment

At the end of the HP agreement, the option to purchase fee is typically lower than the balloon payment required in Personal Contract Purchase (PCP) agreements (PCP is another way to finance a car that you might consider, find out more in our guide Buying a car on finance: HP versus PCP). 

This means that when the time comes to take ownership of your vehicle, the final cost will be smaller, making the transition to ownership more manageable.

No mileage restrictions

Unlike some other financing options, HP does not have mileage limits once your agreement starts. You can drive your car as much as you need, without facing extra charges. 

This makes HP ideal for those who rely on their vehicle for daily commuting or long trips.

By contrast, other financing options often require you to set a mileage limit for the year. If you exceed this limit, you could incur additional costs that can start around £0.25 per mile. 

It’s always a good idea to check with your finance provider about any mileage restrictions before signing up to an agreement.

Second hand car finance 

Some finance options are limited to new or newer cars, which can mean higher values and increased monthly payments. 

With hire purchase the loan amount is typically tailored to your affordability and budget, giving you more flexibility in your car search. 

This means you can secure financing for second-hand cars as well. This makes HP a great choice for those looking to keep their monthly payments as low as possible, while still having a variety of cars to choose from.

Considerations of HP car finance 

It’s great to consider the benefits of a finance product, but it’s even more important to take into account the potential drawbacks. 

By doing this, you can avoid unexpected surprises and ensure you fully understand all the requirements throughout the finance agreement.

Potential for repossession

If you miss payments on your HP agreement, the lender has the right to repossess the car. This means you could lose the vehicle and it may also negatively impact your credit score. 

Before entering into an HP agreement, it’s important to make sure that the monthly payments are affordable and manageable to minimise this risk.

Life can be unpredictable, and personal circumstances can change due to unexpected events. If you find yourself struggling to manage your finance agreement, it’s always best to contact your finance provider right away. 

Let them know about any changes in your situation and they may be able to offer help or alternative solutions.

Additional fees

Most HP agreements include additional fees, such as documentation or admin fees for processing your application. These fees can increase the total amount you need to pay, or increase your first monthly repayment.

Additionally, if you choose to settle your loan early, some lenders may charge an early repayment fee. Not all finance providers apply this fee, but it’s something to look out for. 

It’s important to read the terms of your agreement carefully to understand any extra costs involved and avoid unexpected surprises.

Poor credit scores

If you have a less than perfect credit score, it can affect your ability to secure HP car finance. 

Eligible lenders might offer you higher interest rates, which can increase the total loan cost and result in higher monthly repayments.

In some cases, poor credit could lead to a refusal of car finance altogether, limiting your options and making it more challenging to find a vehicle within your budget.

Before applying, it’s helpful to check your credit score and understand how it could affect your application.

What is a good credit score and what is a bad credit score?

Different credit reference agencies use their own scoring systems, generally with higher numbers indicating better credit. However, keep in mind that these are scores provided by the credit agencies themselves. Lenders will also conduct their own assessments, taking your credit score into account alongside various other factors.

• Experian typically give scores from 0-999, anything from 881 and above is considered good.
• TransUnion 721 or above is rated good or excellent, depending on the number.
• Equifax   670 or above is rated good, very good, or excellent, depending on the number.

For more details on how credit scores are calculated, you can visit each agency's website

Personal contract hire: How it works

Personal contract hire (PCH), commonly known as car leasing, is a popular choice for those who want to drive a car without committing to ownership (below we explain why this can be beneficial). 

With PCH, you are essentially renting the vehicle for a fixed period, usually between 2 and 4 years. At the end of the contract, you simply return the car to the leasing company.

This option is particularly attractive for individuals who like driving a new car every few years, without worrying about depreciation (as a car gets older the amount it is worth reduces, this is called ‘depreciation’) or resale value. 

PCH also typically involves lower monthly payments compared to financing options like hire purchase, since you’re only paying for the car’s depreciation during the lease term, rather than the full purchase price. 

This can make it more affordable for those who want a reliable car without a large financial commitment.

Start by finding out how much you can afford to pay per month to cover the leasing cost. You can do this by comparing deals online, talking to lenders or using a broker. A broker may charge for this service.

Choosing the car

If your PCH application is approved, you can begin the process by selecting the car you want to lease.

You can choose any car from a dealership, as long as it meets the leasing company’s criteria. Each provider has its own requirements and typically works with a network of trusted dealerships across the country. 

Initial payment

When entering into a PCH agreement, you usually pay an initial payment, often referred to as a deposit. This deposit is typically a multiple of the monthly payment, and it reduces your overall monthly lease costs. 

Some providers may require a specific percentage upfront, while others might offer flexible deposit options. 

Paying a higher initial amount can lead to lower monthly payments, making the lease more affordable over time. 

However, if you choose a lower initial payment, your monthly lease costs will be higher. It’s always best to do your research and compare providers to find an option that works best for your budget.

Fixed monthly payments

With PCH, your monthly payments are fixed for the duration of the lease, so you will know exactly how much you need to pay each month. 

This makes it easier to budget for your car expenses. Payments are spread out evenly over the lease term, usually between 2 to 4 years. 

Most PCH agreements include a maintenance package covering routine servicing and repairs. However, it’s essential to check for any additional fees, as these can vary by provider. Asking about potential fees during your application can help avoid surprises.

Mileage limits

An important aspect of PCH agreements is the mileage limit set at the beginning of the lease. Most agreements will specify a maximum number of miles you can drive each year. 

If you exceed this limit, additional charges may apply, often around £0.25 per mile, though some providers may charge more. 

Therefore, it's important to understand your driving habits before signing a PCH agreement. If you expect to be driving more than the agreed amount, you may have the option to negotiate a higher limit at the start of the lease, which could help avoid extra costs later on.

Car ownership

With PCH, you do not own the car at the end of the lease term; instead, you return it to the leasing company. 

This arrangement suits those who enjoy driving a new car every few years without the responsibilities of ownership, such as depreciation or resale concerns.

However, if you decide you’d like to keep the car, PCH typically doesn’t offer a purchase option at the end. Instead, you can choose to lease a different vehicle or start a new agreement with a newer model.

Considerations of personal contract hire

As mentioned above, understanding the drawbacks of PCH is just as important as knowing the benefits to make a fully informed decision. Below, we outline the main drawbacks of PCH to assist in your choice.

Potential damage charges

When returning the vehicle at the end of your PCH agreement, it must be in good condition. If there is damage beyond what is considered normal wear and tear, such as significant scratches, dents, or interior damage, you are likely to be charged for repairs. 

These charges can add up quickly, and it can be difficult to assess what is considered “normal" wear and tear. As a result, it's important to maintain the vehicle well, throughout the lease term, to avoid unexpected costs at the end.

Commitment to terms

PCH contracts often require you to commit to the full lease term. If your circumstances change, such as needing to move or having a change in financial situation, terminating the lease early can result in additional fees. 

Whilst some agreements may allow for early termination, it often comes with a large fee that can make it costly to exit the contract before the end date. 

Before committing to a PCP contract, it is essential to fully understand the exit terms and inquire about and associated fees to make an informed decision. 

No equity 

Since you are essentially renting the car with PCH, you don’t build any equity (you never own any percentage of the car) during the lease term. This means you won’t have a trade in value at the end of the contract.

In comparison, financing options like hire purchase allow you to eventually own the vehicle.

With PCH, you may spend a considerable amount on leasing without any return on investment, making it less appealing for those seeking long-term value.

Which is the best option for you? 

Choosing between HP car finance and PCH depends on your personal circumstances and financial situation. 

Consider factors such as whether you want to own the car at the end of the agreement, your budget, credit score, and if prefer the option to upgrade your car every few years. Your personal preferences are also important in this decision.

Take the time to think about your needs and how each option will work for you over the coming years. Whether you are financing a new or used car, both car finance and leasing are significant commitments that require careful consideration to find the right fit for you.

Apply for HP car finance 

If you think HP car finance is the best option for you, AutoMoney Motor Finance are able to offer car finance on a wide range of vehicles nationwide. 

To see if we can help you, call our friendly team on the free phone number above, or click through to apply for HP car finance  with us. 

Representative example

You could borrow £10,000 over 60 months with an initial payment of £490.66 (including £199 Admin Fee) followed by 58 monthly payments of £291.66 with a final payment of £490.66 (including optional £199 Option to Purchase Fee).

Total amount repayable will be £17,897.60.

29.3% APR, annual interest rate (fixed) 24.7%.

This example uses the representative APR. This is the rate at least 51% of customers are expected to get.

Lending is subject to status and additional affordability checks. Rates quoted are subject to change and will depend on lending amount and personal circumstances.

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