What is the difference between HP and PCP?

Today, many people choose to buy or lease products on finance, from kitchen utilities to mobile phone contracts, and the world of automobiles is no different. There are many different forms of car finance, and it can be difficult to understand which would work best for you. Here we compare two of the most popular: Hire Purchase and Personal Contract Purchase. Understanding the differences between HP and PCP can help you make an informed decision on your next car purchase.

What is Hire Purchase?

Hire Purchase, or HP, is a popular type of car finance, in which you pay off the value of your car plus interest in equal monthly instalments over a fixed term, after an initial upfront payment. This initial payment, the interest rate and the length of the contract can vary, all which will affect the price of your monthly instalments. A typical HP contract might last 36 to 48 months, after which - if you have kept up with your payments - you will own the car outright.

What is Personal Contract Purchase?

Personal Contract Purchase, or PCP, is another method of car finance. Just like with HP, you pay a monthly instalment over the length of an agreed upon contract, after an initial payment. However, during this period you do not pay off the full value of the car. Instead, you pay the difference between its current value, and the amount the finance lender predicts it will be worth at the end of the contract, plus interest. This second value is known as the ‘Minimum Guaranteed Future Value’, or MGFV.

At the end of the contract, typically lasting between 24 and 48 months, you have several options. If you want to own the car, you can pay off the rest of it in a single ‘balloon payment’. However, if you have kept up with your payments and the car’s maintenance, then you can also hand it back to the dealership and walk away, or trade in the value against a different car.

Is HC or PCP better?

There are pros and cons to both Hire Purchase and Personal Contract Purchase - it’s all about finding the best deal for you.

With an HP agreement, after you have finished paying off your monthly instalments, you will own the car outright. You are not tied into any maintenance agreements or mileage caps. HP can also work out cheaper overall than PCP, especially if buying a used car.

On the other hand, HP contracts are often longer, and you will not be able to sell or modify the car during the term of the agreement.

If you choose PCP, then as you are only paying off the difference between the current value of the car and the MGFV, your monthly instalments will usually be cheaper than a HP car, meaning you may be able to afford a car previously beyond budget. You also have more flexibility at the end of the contract, and can choose to purchase the car in full, or hand it back to the dealership.

However, with PCP you don’t automatically own the car at the end of the contract, and will need to make a ‘balloon’ payment if you wish to do so, which can be expensive. PCP is also usually only available for cars selling for over £10,000. Furthermore, as the car dealership wants to keep the car in good condition, you will also be tied into a mileage cap and need to keep up with any maintenance requirements to avoid penalty fees.

Which should I choose?

Both HP and PCP can be great options when looking for a new car, but which is the right choice for you depends on your personal requirements and financial situation.

If you are certain that you want to own a car, are confident in your ability to afford higher monthly payments, and want to avoid a mileage cap, then HP would be a better choice overall.

However if you are not ready to commit to car ownership, want to keep your monthly payments low, or think you might want to upgrade to a newer model after a few years, then PCP can be a great decision.

Can I cancel my car finance early?

It can be possible to cancel your finance agreement early, but this process is often complex. Your car will need to be valued, and a settlement figure provided by the lender. This figure is then deducted from your car;s valuation, determining the amount of equity in the car. If this is positive, it can be used as a deposit towards a new car and finance package, but if not then you will need to pay off any remaining debt before you hand over the car.

If you are considering buying a car on finance, then here at Eastern Western we have plenty of options. Please don’t hesitate to get in touch, or visit one of our dealerships, where our expert team will be happy to help!