Hire purchase (HP) vs. personal contract purchase (PCP)

Both personal contract purchase (PCP) and hire purchase (HP) are types of car finance where the finance is secured against the car you’re buying.

This means with both of these types of car finance, you pay for your car in monthly instalments but you won’t officially own the car until the last payment is made. They both usually involve a deposit (around 10% of the car value) you need to put down at the start of the finance agreement.

However, there are a couple of key differences.

When comparing the difference between PCP and HP, it comes down to the definition of value for the vehicle.

• With HP, the total finance cost is the car’s value, which does not include a deposit or the part-exchange allowance (trade-in value of the previous motor) on it.
• With PCP, you have two choices of values.
• The first is the total remaining value of the car with a final balloon payment.
• And the second would be its estimated depreciated value at the end of the agreement. You can pay this balloon payment or hand back the car once the lease has ended.

Essentially, with a HP agreement, the value of the car, plus interest, is simply spread across the term of the agreement.

At the end of the HP contract, you can choose to end the agreement and take possession of the car.

But that’s once you’ve paid off the car’s full value. The last payment is a one-off and is a fee called Option To Purchase. Then again, it’s not a balloon payment.

There are many criteria that PCPs fulfil; namely, they allow more flexibility. Also, being able to finance a vehicle for its estimated depreciated value means you’ll be saving and paying smaller monthly instalments.

But, be wary of the final balloon payment. Always make sure you know the amount this balloon payment will be. Otherwise, you could be in for a shock.

So, it isn’t clear whether it’s worth it, but whether you can afford that last payment.

With HPs, you are working out your monthly instalments by dividing the cost of the vehicle for the period you’ve agreed on.

You will be required to make a deposit, which will lower the total amount you owe.

But unlike a PCP, you will own the vehicle on the last payment.

Now, let’s run through the advantages of both HP and PCP.

One of the major benefits of selecting an HP plan is it is simple and has no surprises.

This simply means you can really pick the terms that suit your budget. And when you’ve done with the contract, you own the vehicle. Lastly, there are no mileage limits when applying for HP finance.

There’s no denying it; this is the more expensive option. It also requires that you have an excellent credit history to apply.

Another issue is you are locked into the contract, and you can’t sell the asset during the term of the agreement.

All this means is you’re going to be stuck with a depreciating asset. Which is a downer, so what are the advantages of an HP policy?

As we’ve stated, most car manufacturers will offer assistance with the deposit contribution to sweeten the deal. During the contract, you can change your car.

And if your car holds its value, after the contract has come to an end, you could turn a profit. Maintenance and servicing are included with the monthly repayment.

The last benefit is what happens when you’re halfway through paying off the car. In this scenario, you can end the agreement. However, this will require some capital.

While it might seem all good news with PCPs, there are downsides. The fact there is restrictive mileage per year could land up with you paying additional fees.

Another issue is you don’t own the car until that balloon payment, as well as additional charges on the wear and tear on the vehicle.

And the last major issue is the balloon payment. In many situations, it will require a loan to pay it off.

Balloon payments can easily be massive and outvalue the cost of the car. This means if you love the car, you might not be able to even own it at the end of the day.