HP vs. PCP: Which is best for me?
Find out what factors you should consider when choosing between HP or PCP finance
Buying a new car is an exciting experience but involves lots of research and debate. One of the most crucial decisions you will have to make is how to finance it. If you’re unable to pay for it upfront or engage in a personal loan, then you are probably considering Hire Purchase (HP) or Personal Contract Purchase (PCP) finance.
Both of these types of finance allow you to spread the cost of the car over a period of time. However, there are also some key differences between them that you should consider before choosing one. Read on further to find out what these differences are and which option might be better for you.
What is Hire Purchase (HP)?
Hire Purchase (HP) is a type of car finance that allows you to pay for a vehicle in instalments over an agreed period of time, usually between 12 and 60 months. It works by putting down a deposit, usually a minimum of 10% of the car’s value, and hiring the car from a finance company through fixed monthly payments with interest. Eventually, upon reaching the end of your contract, you can choose to own the car outright by paying a small 'option to purchase' fee.
What is Personal Contract Purchase (PCP)?
As with HP, buying a car using Personal Contract Purchase (PCP) finance involves paying a deposit and monthly instalments with interest. However, you’ll find that the amount you will pay each month may be conveniently lower. This is because you're only paying the lender the expected loss in value of the car over the period of the contract. As a result, at the end of your contract, instead of having the sole choice of owning the car or returning it (like you would with HP), you’ll have three options:
Pay a balloon payment to own the car outright
Return the car to the lender and walk away with nothing more to pay
Part-exchange the car for a new one and start a new PCP contract using any equity you have built up as a deposit
Which finance option is better for me?
While there is no definitive answer as to which finance option is better for you, as it ultimately depends on your personal circumstances and preferences, there are a good few key factors for you to consider:
If you’re on a tight budget and need lower monthly payments, PCP might be more suitable for you. This is because you are only paying off the predicted depreciation of the car rather than the car itself, so instalments are more affordable. Saying this, however, if you eventually want to own the car outright you should factor in the balloon payment you’ll have to pay at the end of the contract, as this can be quite a large sum.
If you know that from the start of your contract, you’ll want to own the car, HP Finance might be the better choice for you. With HP, you are essentially signing up to own the vehicle at the end of your contract. This differs from PCP where in order to own the car at the end of your contract, you’ll have to fork out a large lump sum (known as the balloon payment).
If you find yourself keen to switch vehicles every couple of years, or just want the flexibility to only own one for a short while, then PCP might be more fitting. Unlike HP, where you only have the option of owning the vehicle at the end of your contract — which leaves you to deal with selling it if you don’t want or need it anymore — PCP gives you the option to either part-exchange your car for another or return it all together with no questions asked (you still have the option to buy it outright, of course).
Something that we haven’t alluded to in this article is the mileage restrictions that are imposed on you when you finance your car using PCP. As you are only paying the estimated depreciation value of the vehicle you’re ‘borrowing’, lenders put in place a maximum annual mileage limitation. If you surpass this limit, you’ll have to pay an extra charge at the end of the contract. So, if you find that each year you tend to drive a lot of miles, HP might be the better option for you as you won’t be restricted by annual mileage.
If you often pick up little scratches, make small dents, or leave marks on your car, then HP might be the better option for you. This is because with PCP if you decide to return the car to the lender, you are expected to do so in good condition with only minor wear and tear. So, in the case that you have inflicted some obvious damage you could be charged extra. With HP, on the other hand, you’ve got the intention of owning the car, so the condition it’s in will be entirely your responsibility.
Finance your next car at West Motors
If you now have a better understanding of what HP and PCP are and have considered the factors presented in this article, then you are probably ready to choose your next car! Here at West Motors, we have a whole range of premium used vehicles in stock available for purchase using either HP or PCP finance. Still unsure about your finance options? Do not hesitate to get in touch with us — we are happy to answer any questions you may have.