PCP, or a Personal Contract Purchase is fast becoming one of the most popular ways of financing the new car of your choice, simply due to its flexibility. You choose the car, the deposit, how long you want the contract to run for and the mileage you intend to do and in return you get fixed cost motoring for the term of the contract. At the end of the contract you have a choice to either buy the car outright for an agreed lump sum (the GFV or final balloon payment), or hand the vehicle back to the lender and walk away with absolutely no further obligation.
When you take out a PCP (Personal Contract Purchase), the car that you have chosen will be given a guaranteed future value or GFV. This is a calculation made by the lenders that is set for the period of the contract. The GFV plus any deposit you have made will be deducted from the cash price of the new car and your monthly payments will be calculated based on the outstanding balance, plus interest on the balance and the GFV, meaning that in essence you are only financing the depreciation of the new car.
Hire Purchase (HP) is the traditional way to finance a car purchase. You pay off the entire price of the vehicle through a series of monthly payments. At the end of the contract period the vehicle becomes your property.The monthly payment is determined by the amount of deposit paid, the period of the contract and the sale price of the vehicle.
HP is very similar to borrowing a sum of money from a bank and paying it back over a fixed period of time, with interest. Hire purchase is a type of secured loan which are often preferred over alternative (unsecured) loans because they allow a greater borrowing limit. The term "secured loan" means exactly that, a loan that the lender can secure against an asset (in this case, a car).
Lease Purchase is structured in the same way as a Personal Contract Purchase(PCP) in that a capital lump sum amount, known in this instance as the Residual Value (RV), is deferred to the end of the agreement and this must be settled to gain outright ownership. As with PCP, the RV is based on the type of vehicle and the suggested annual mileage covered by the vehicle. By deferring a lump sum to the end of the agreement, the RV reduces the regular monthly payments and makes more expensive vehicles far more affordable.
As a customer you will benefit from a slightly lower finance rate with a Lease Purchase product as, unlike PCP, there is no guarantee offered at the end of the agreement in terms of handing the vehicle back to the finance company. In other words, unlike PCP, Lease Purchase offers no option to walk away from the vehicle at the end of the contract.It is your responsibility then to settle the final RV (or balloon payment) either though additional finance, cash or settlement by part-exchange.
"Put simply, Lease Purchase has a lower monthly payment than PCP, but you have to purchase the car at the end of the lease term"
Lease Purchase repayment periods are typically taken over 2, 3 or 4 years and settlement can be made at any stage of the agreement. Deposits for Lease Purchase are normally a minimum of around 10% and a maximum of 50% of the total vehicle price. Becuase the funder is exposed to less risk, customers will normally benefit from a slightly lower interest rate and there will be no fixed mileage contract.