Personal Contract Purchase vs Hire Purchase Finance
Personal contract purchase (PCP) and hire purchase (HP) are the two most popular agreement types when it comes to buying a vehicle on finance. Both allow you to borrow the entire sum of money necessary to purchase your car, but with HP finance, you will need to pay back the total amount borrowed, whereas with PCP, you will only have to pay for the vehicle’s depreciation. From this, you may think the choice between PCP and HP is an obvious one, but there are advantages and disadvantages to each.
PCP
This type of car finance has become vastly popular in recent years. It requires you to pay a percentage of a vehicle’s original price in monthly instalments. Once you have chosen the car you wish to buy, the length of your contract must be determined, and your dealer will estimate the amount that your car will be worth when your agreement comes to an end. This is referred to as the Guaranteed Minimum Future Value (GMFV) and is the total amount you will repay.
You will effectively be hiring the car until the end of your PCP agreement, when you will have the option to keep the car, by paying a large final fee known as a balloon payment, or return the vehicle to the dealer.
HP
HP finance is more straightforward. Again, you will have to agree on the length of your contract term with your dealer, but once you have chosen the car you want, you will repay its whole value in more manageable monthly instalments. When your contract comes to an end, the car will be yours to either keep or sell on.
PCP Pros
The main advantage that PCP has over HP is that the monthly repayments will be lower, as you are paying for the car’s depreciation, rather than its entire cost. The freedom to choose whether or not you want to keep the car or upgrade your vehicle and initiate another PCP contract is also a bonus.
PCP Cons
While PCP finance agreements come with the benefit of flexibility, they also impose restrictions. As you are hiring the car with no guarantee of keeping it at the end of your agreement, it will still officially belong to the dealer, meaning that you must take good care of it! At the beginning of your agreement, your dealer will set a mileage cap. If this limit has been exceeded when you return the vehicle, you will be fined and if the car has been damaged, you will be charged for repair costs.
Furthermore, if you do decide that you want to keep the car at the end of your agreement, you will have to find a large sum of money to cover the required balloon payment, and you never know what your financial situation will be around three years in the future.
HP Pros
On the other hand, you will not have to worry about a big final payment or keeping an eye on your mileage with a HP contract. You will become the legal owner of the car, and will be able to keep it or sell it on, whereas with PCP, you could be left with nothing after the end of your contract term.
Additionally, HP agreements are not as rigid as you might expect. If you change your mind about the purchase, you can return the car to the dealer once you have paid back half of the amount you borrowed, and be released from your contract. This is called ‘voluntary termination’.
HP Cons
There are downsides of HP agreements too. The monthly repayments are higher for HP than they are for PCP and you will not own the vehicle until the end of the contract period. If you incur financial difficulties during this time and are unable to afford the repayments, your finance provider will be able to repossess the car.
Which is Right for You?
At the end of the day, it all depends on your personal situation. PCP is better for those who are unsure of whether or not they will want to keep the car when their contract finishes, and are good at saving if they decide they do want to. It is also good for motorists who like to keep up with trends and will want to upgrade their vehicle after a few years.
HP is more ideal if you are certain that you want to own the car and you can afford the monthly repayments, as you will not have to worry about getting the money together for a balloon payment when your contract ends.