Buying a car on finance: HP versus PCP

When you're looking to buy a car on finance, there are a few different ways to do it. Two of the most common options are Hire Purchase (HP) and Personal Contract Purchase (PCP).

You can also consider other choices, like Personal Contract Hire (PCH) and a personal loans.

It's important to explore your car finance options. This way, you can find the one that works best for your budget and needs. Each option has its good points and some things to think about. Make sure you understand how each one works before you decide.

Hire Purchase (HP)

HP is one of the simplest car finance options. With HP, you can either pay an initial deposit or go for a no deposit car finance option. After that, you’ll make fixed monthly payments over an agreed period.

If you pay a deposit, your monthly payments will usually be lower. But, paying a deposit means you need to have a chunk of money ready, which isn’t always possible for everyone.

If you don’t want to pay anything upfront, a no deposit HP might be a better choice for you. However, keep in mind that your monthly payments might be higher, and you could end up paying more overall compared to if you had paid a deposit.

For some, this is a trade-off they’re willing to make if they don’t have savings set aside for buying a car.

Once you’ve made all the payments, including an option to purchase fee at the end, the car will be yours.

Benefits of HP car finance:

• Ownership: You will own the car outright at the end of the agreement (if you choose to keep it and pay the option to purchase fee).
• Fixed payments: Monthly payments are fixed and spread across the term of the agreement, meaning you can plan ahead and budget for each one.
• Lower final payment: The option to purchase fee at the end of the agreement is usually smaller compared to a PCP ‘balloon payment’ (the name given to the payment at the end of a PCP agreement).

Downsides of HP car finance:

• Higher monthly payments: Since you’re financing the full value of the car, your monthly payments may be higher than with PCP.
• Less flexibility: You don’t own the car until the final payment, so you can’t sell or modify it without the lender’s permission.
• Impact of adverse credit: Poor credit may result in higher interest rates or difficulty securing HP car finance.

Personal Contract Purchase (PCP)

PCP car finance is great if you want flexibility at the end of your contract. You have options on what you want to do with the car when the agreement ends

You start by paying a deposit, and then your monthly payments are usually lower than with HP car finance. With PCP, you're only paying off the car's depreciation (how much it devalues over time), not the full price of the car.

At the end of the term, you have three choices:

1. Make a final "balloon payment" to keep the car.
2. Return the car with nothing more to pay.
3. Trade it in for a new model.

Benefits of PCP car finance

• Flexibility: At the end of your contract, you can choose to keep the car, return it, or upgrade to a newer model.
• Lower monthly payments: Payments are usually lower than HP, because you're only paying for the car’s depreciation.
• Opportunity to upgrade: PCP allows you to upgrade to a newer model when your contract ends.

Downsides of PCP car finance

• Final payment required for ownership: To own the car at the end of the agreement, you must make a large final payment, often referred to as a "balloon payment."
• Mileage and condition limits: Exceeding the mileage limit, or returning the car in poor condition, can result in additional charges.
• Additional cost for ownership: Without making the final payment, you won’t own the car at the end of the term.

Extra charges can arise with PCP car finance if you go over the agreed mileage limit, which is set at the beginning of your contract. Each mile usually costs you a fee.

You might also face charges for any damage, beyond what is considered normal wear and tear. This includes any significant scratches, dents, or interior damage that could affect the car's resale value.

It's important to carefully review the terms of your PCP contract to understand these potential costs and to avoid unexpected expenses at the end of your contract.

If you like the benefits of PCP car finance, but are worried about the large balloon payment at the end , there is an another option.

Some lenders, like AutoMoney Motor Finance, let you refinance your PCP balloon payment. This allows you to keep the vehicle you love without paying a large amount all at once. Instead, you can keep making manageable monthly instalments, eventually owning the car outright.

Alternative car finance options

If you're still unsure whether to buy a car on finance using HP or PCP, explore some alternative options below:

Personal Contract Hire (PCH)

PCH, often referred to as ‘car leasing’, is a popular way to finance a car without ever owing it.

With PCH, you rent the car for a fixed period, usually between 2 to 4 years, by making monthly payments. At the end of the contract, you simply return the car to the leasing company.

This option is ideal for those who prefer driving a new car every few years, without worrying about depreciation or resale value.

Benefits of Personal Contract Hire

• Lower monthly payments: Since you're not paying towards ownership, the monthly payments are often lower compared to other options like HP or PCP car finance.
• No depreciation worries: You don’t need to worry about the car's value decreasing over time, as you simply return the car at the end of the contract.
• Drive newer cars: PCH allows you to drive a new or nearly new car every few years.
• Maintenance packages: Many PCH agreements offer optional car maintenance packages, which cover routine servicing and repairs, making it easier to manage running costs.
• No balloon payment: Unlike PCP, there's no large final payment required at the end of the contract, but remember – this is because you don’t have the option to buy the car.

Downsides of personal contract hire

• No ownership: You will never own the car with PCH. Once the contract ends, you must return the vehicle, leaving you without a car, unless you enter a new contract.
• Mileage limits: PCH contracts come with strict mileage limits. Exceeding these limits can result in extra charges.
• Potential damage charges: If the car is returned with any damage, beyond what is considered fair wear and tear, you may be charged for repairs.
• No equity: Since you're essentially renting the car, you don't build any equity in the vehicle, meaning you won't have a trade-in value at the end of the contract.
• Commitment to contract terms: PCH contracts are typically fixed, so if your circumstances change and you need to end the contract early, you may face early termination fees.

Personal loan

A personal loan from your bank or a suitable lender is another option for financing a car. With a personal loan, you borrow the money to buy the car outright and then repay the loan in monthly instalments. This option provides the most flexibility in terms of ownership and payment terms.

Benefits of a personal loan:

• Immediate ownership: You own the car from the start, giving you the freedom to sell or modify it as you wish.
• No mileage restrictions: Unlike PCP car finance or PCH, there are no mileage limits or condition clauses.
• Flexible repayment terms: You can often choose the length of the loan term to suit your budget, which may help lower monthly payments.

Downsides of a personal loan

• Higher interest rates: Depending on your credit score, personal loans can come with higher interest rates compared to other car finance options.
• Creditworthiness: Approval depends heavily on your credit history, which may limit your options, or increase costs.
• Shorter repayment terms: Unlike car finance options like HP and PCP, which allows you to spread payments over a longer period, personal loans often come with shorter repayment terms. This can result in higher monthly payments.

Which finance option is best for you?

Deciding between HP, PCP, PCH, or a personal loan depends on your financial situation, how long you plan to keep the car, and your driving habits.

• If you want to own the car outright and prefer fixed monthly payments, HP car finance might be the best option.
• If you prefer lower monthly payments and want flexibility at the end of your contract, PCP could be more suitable.
• If you enjoy driving a new car every few years and don’t want the responsibility of ownership, PCH might be ideal.
• If you want complete ownership from the start and the flexibility to sell or modify the car, consider a personal loan.

Apply for HP car finance today

If you decide HP car finance is the right choice for you, we’re here to help. We are a UK based HP car finance lender. You can call us free on the number above and speak directly to our friendly team about your borrowing needs. Or, you can apply for HP car finance online.

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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