PCP vs HP: Which Is Best For You?

Personal Contract Purchase (PCP) and Hire Purchase (HP) are two types of car finance agreement.
When you buy a car on finance, you’re basically borrowing money from a finance provider. You’ll pay a deposit at the start, and then pay back your debt (plus interest) in monthly instalments until your contract finishes. The amount you pay, and your options at the end of your contract, vary depending on the type of finance agreement you choose. Here, we’ll talk you through the differences so you have a better idea of which one suits you.

Hire Purchase (HP) is a way of paying for a car in instalments while you use it.
Rather than paying everything up front, you’ll pay a deposit and agree to a set monthly repayment and interest rate. If you choose a HP contract, the total amount you borrow will be divided into equal monthly payments. HP contracts tend to last three or four years, so you’d make 36 to 48 payments towards the total cost of your car. At the end of the contract, you’ll have paid off the amount you borrowed in full, and pay the “option to purchase” fee, and own the car. The amount you pay each month depends on the size of the deposit and the length of your contract, plus any interest charged and purchase or contract fees. Longer contracts tend to result in lower monthly payments, but you’ll pay more interest over time, so could end up paying more for the car in the end. The interest charged is usually presented as the annual percentage rate (APR). APR is the annual percentage rate of charge which, takes into account the interest paid on a loan, plus any other charges like an arrangement fee. It’s commonly used to compare credit and loan offers.

Pros of HP finance

• You’ll own the car at the end of the contract, without having to pay a final fee. • You’re free to keep the car or sell it at the end of the contract. • There usually aren’t any mileage limits or charges for wear and tear on the car. • HP is available for new and used cars.

Cons of HP finance

• The initial deposit and monthly payments are likely to be higher than a similar PCP deal. • HP may not suit you if you want to change your car after a few years. Learn more about HP.

Personal Contract Purchase (PCP) is similar to Hire Purchase in that you borrow money and pay back in monthly instalments.
As with HP, you make an up-front deposit at the start and make monthly payments after. Unlike HP, however, you don’t pay off the full value of the car in instalments. Instead, you pay off the amount the finance provider predicts the car will lose in value over the length of the contract, minus your deposit. This is called the minimum guaranteed future value (MGFV). So say you get a car worth £30,000 and it’s projected that in three years, the car will be worth £22,000. You’ll pay back the £8,000 difference over your three-year contract, in 36 instalments. The MGFV will vary between cars, trim levels and engine sizes. You’ll pay monthly for the duration of your contract, usually for 24 to 48 months. The MGFV can also be affected by the length of your contract and the car’s mileage at the end of the contract. The higher the mileage, and the older the car, the less valuable it will be at the end of the contract and so the more you’ll have to pay each month. Another major difference between PCP and HP is that a large percentage of your debt is left to the end of the loan. It usually means you pay smaller amounts each month (when compared to HP) until the end of the contract, when you pay off the remaining amount in a ‘balloon payment’ before you own the car. Unlike HP, you also have the option to return the car at the end of the contract. And if your car is worth more than the MFGV (for example you’ve kept it in great condition and it’s low mileage) then you can use the difference between your final payment and its true market value as a deposit on another PCP contract car.

Pros of PCP finance:

• You have the option of keeping or returning the car at the end of your contract for more control and flexibility. • As some of the car’s value is delayed to the final balloon payment, you may require a smaller deposit and lower monthly payments than on a HP contract • You can trade the car in for a newer model at the end of your contract. • If you trade the car in instead of selling it, you don’t have to cover the cost of depreciation when your agreement ends.

Cons of PCP finance:

• Terms and conditions to consider often include a mileage limit, with fines if you exceed it, and charges for damaging the car. • At the end of the contract, you’ll have to make a large balloon payment if you choose to keep the car. • PCP deals tend to be limited to newer makes and models. Learn more about PCP.

Both HP and PCP contracts require a deposit upfront towards the cost of the car. This is deducted from your overall repayment.
You may also have to pay another deposit to secure the car in dealer stock. This may be refunded or deducted from your loan once the contract is confirmed. You may also have to pay contract and arrangements fees, so make sure you’ve check with the finance provider and budgeted for any additional costs.

Let's compare the key areas in these two finance agreements:
• Overall cost of the contract • Mileage allowance • Car maintenance • Owning the car

Hire Purchase repayments can be high compared to PCP, but they don’t change. So, provided you keep up to date, you know how much you’re paying and for how long.
You’ll normally pay around 10% of the car’s value for a deposit, and an interest rate will vary. PCP contracts are built around the minimum guaranteed future value (MGFV) of a car. This is how much the car is projected to be worth at the end of the contract and can vary. This amount may be reduced if you go over the agreed mileage or the car is not in fair condition at the end of the agreement. Monthly PCP payments tend to be lower than HP, but you’ll have to budget for the final balloon payment if you want to keep the car. Both PCP and HP deals charge interest. The interest rate you pay will depend on a number of factors, including the car you’re paying for, the length of your contract and your credit rating. Sometimes, 0% interest deals are available but you normally have to pay a higher deposit to secure them.

Hire Purchase contracts don’t tend to include mileage limits, as you’re committing to purchase the car at the end of the agreement.
Under a PCP contract, you’re technically borrowing the car from the finance provider until you pay the balloon payment and buy it off them. As such, the lender will agree a mileage allowance with you – this is a set number of miles you can drive annually over the span of the contract. The more mileage you do, the less the car will be worth at the end of the contract, so lower mileage contracts tends to be cheaper. Just note that if you exceed your mileage allowance, you’ll have to pay an excess mileage fee which can prove quite expensive. As always, explore your options before you commit.

Hire Purchase contracts don’t tend to include fines for wear and tear. As with mileage allowance, you’re buying the car in instalments so the car will belong to you at the end. If it’s in a bad state, that’s your problem.
And just like with mileage in a PCP deal, as you’re borrowing the car from the finance provider, so they’ll insist you take good care of their property. The minimum guaranteed future value (MGFV) is partly based on your returning it with a full manufacturer service history, so proper maintenance and servicing is essential. Some contracts specify you can only get your car serviced by their dealer service network, so check the fine print and ask the provider if this is the case. If you return the car at the end of your PCP contract, you may have to pay to cover any damages that aren’t classed as fair wear and tear.

Under a Hire Purchase agreement, you’re paying off the car in instalments and will own it at the end of the contract after paying the option to purchase fee.
Under a PCP agreement, you can choose to buy the car with a final balloon payment, return it, or trade it in against another car. If you want to buy the car, Hire Purchase agreements can work out cheaper overall but this depends on the cost of the car, the interest rates you’ll pay and other factors so shop around to find a deal that suits your budget. Remember: you do not own the car until the end of a HP or PCP agreement, so if you’re unable to keep up with payments the finance company may repossess the car.

There’s something to be said for both.
PCP contracts usually offer low monthly payments, and can come with lower interest rates and manufacturer discounts. They’re also a good option for those who aren’t sure they want to own and keep a car. HP contracts can prove a more affordable way of buying a car than PCP overall, so if you’re certain you want to buy then this could be the choice for you. We’ve covered some of the main differences between the two, but you can learn more about both Hire Purchase and Personal Contract Purchase contracts on Auto Trader, and compare finance deals with us too.

Sometimes finance providers or dealers run a deal in which you pay 0% APR for part or all of the contract – this will be at the discretion of the lender, and will depend on your credit rating among other factors. Always check the small print before you sign.
While it’s an appealing option, you should work out whether 0% actually works for you. It can involved larger deposits upfront and higher monthly repayments to pay the car off more quickly– learn about 0% finance here.

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