PCP finance vs hire purchase: which type of car finance is best?

PCP and hire purchase offer two very different ways to finance a car, but which way is best for you? Keep reading to find out

John Evans
Aug 6, 2019

Fewer and fewer people are investing real cash into a new car. Even when budget isn't an issue, the idea of throwing a considerable amount of money at a car that is going to lose value as soon as the rubber hits the tarmac is not what you'd call enticing. 

It has instead become much more popular to purchase a car through finance, and this essentially boils down to two main options: personal contract purchase (PCP) and hire purchase (HP).

But which of these should you use? It may seem that a PCP deal is the obvious choice, as they are now so enthusiastically promoted - online, on the radio, on TV and on billboards, to name a few - and it has certainly become an increasingly popular way for most new and used cars to be funded, thanks to low monthly payments for desirable models. In comparison, HP is rarely talked about and seems to have largely been forgotten.

Even so, an HP deal may actually be a more appropriate form of finance for you than PCP, but how do you decide? We've put this handy guide together to help you make the right choice for your needs.

 

Hire purchase (HP) vs PCP finance – the big difference

Both PCP and HP are centred around an initial deposit, followed by a series of monthly payments. In both cases, these payments can differ in size depending on the cost of the car, its age, the length of the contract and the size of your initial deposit. However, things get more complicated once those monthly payments have been made. 

With PCP, the monthly payments essentially equate to the amount of value the car has lost while you've been driving it, whereas with hire purchase, the monthly payments cover the entire cost of the car.

This means that once your PCP contract is up, you still don't actually own the car, although there is an additional 'optional final payment' - this is closely related to the remaining value of the car - which can be made should you wish to buy the car outright. On the other hand, with HP, once the monthly payments are complete, you have nothing left to pay and the car is already yours.

This means that PCP monthly payments are substantially less than HP when using the same contract terms. However, typically HP is available with longer contracts, so you can often spread the cost over more monthly payments, reducing the difference somewhat.

Simply put, at the end of an HP deal you own the car, while at the end of a PCP deal you don’t, unless you take some additional steps - and make a substantial additional payment - to buy the car.

So which is best?

Depending on your situation, both PCP and HP offer viable alternatives to paying with cash. If you're running on a particularly tight budget, PCP finance makes the prospect of car ownership a much more manageable one, with much cheaper short term costs meaning you can park the car of your choice on your driveway without necessarily breaking the bank. 

Hire purchase allows you to go about the process in a similar way, spreading the cost of a car over a longer period potentially and awarding you the keys to your new car once the payments have been made, since you become the owner at this stage. 

While the issue of interest will have an effect on the overall cost of your contract - with interest charges racking up faster with PCP as you're paying off the borrowing more slowly than with HP - the choice between PCP and HP will come down to personal preference in many scenarios. Those who absolutely want to own the car are better off going for hire purchase, while those who love the idea of getting a desirable model for low monthly payments and then changing after a few years will find it much easier to do that with PCP. See the table below for all the ins and outs.

HP and PCP – their key features and who they suit

Having established the key differences between them, here are the major features of these two forms of finance, and the type of car buyer each suits:

Hire purchase (HP) features:

  • Available on most ages of car, new and used
  • Variable deposit; as little as zero in many cases
  • Spread repayments over a term to suit you - generally up to 60 months
  • No mileage or condition penalties (provided you complete the contract and take ownership)
  • Interest charged on the whole amount of borrowing. You pay less interest overall than with PCP
  • The car is paid off by the end of the term and you take ownership, at which point you can keep it or sell it

HP suits someone who wants to:

  • Own the car rather than just borrowing it, as you would with PCP, at least until you've made the optional final payment 
  • Be free of repayments at the end of the finance term by owning their car with nothing more to pay
  • Have the certainty of still having the car they like, know and trust in years to come
  • Keep their car rather than change regularly
  • Waste less money on depreciation by changing their car less regularly

HP’s biggest single advantage:

You own the car at the end of the term with nothing more to pay and having paid less interest than purchasing a car at the end of a PCP finance deal

Personal contract purchase (PCP) features:

  • Available on all new cars but generally restricted to used cars no older than five years
  • Variable deposit: as little as zero in many cases
  • On new cars is often supported by manufacturer discounts or freebies including free or discounted servicing
  • Monthly payments cover the difference between the initial price and the predicted value at the end of the contract, with interest charged on the whole balance
  • You don't own the car at the end of the term but can return it to the finance company or trade it in
  • It’s possible to own the car by making a the optional final payment, which is set at the start of the contract

PCP suits someone who wants to:

  • Have a newer and better car for the same monthly payments as an older one on HP
  • Not worry about depreciation but instead, know what their car will be worth at the end of the finance term, giving them the option to buy it
  • Upgrade their car regularly and take advantage of improvements in performance, economy and safety
  • Hedge their bets by having multiple options in terms of either keeping the car, returning it or trading it in. You don't have to make a decision until the end of the contract
  • Not worry about repairs and breakdowns by having a newer car that’s should be more reliable and is more likely to be in warranty

PCP’s single biggest advantage:

You can get a better car for your monthly budget and change cars more often

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