Car Finance

Owning a car has become an essential part of modern life for most people. Unless the requirements of your daily life can be accomplished entirely using public transport your life will pretty much depend on being able to own or use a car.  In order to live up to our aspirations we will no doubt have to purchase the vehicle using a modern car finance product such as HP (Hire Purchase) or PCP (Personal Contract Purchase).

Hire Purchase and Personal Contract Purchase. What Are They?

Hire Purchase

The United Kingdom has two primary ways of financing a car purchase. HP is one of them, and it is offered by both third-parties and dealerships. Think of it as a cost-effective way to pay for a car and own it pending the end of a contractual agreement.

An initial deposit of 10 to 40% of the vehicle’s value is required, the rest being covered by monthly installments until the total amount owed is paid. The period of repayment can extend to as much 5 years.

Something else that makes HP an attractive option is the fact it tends to have a lower interest rate than other car finance products.  Overall HP is an uncomplicated way of financing your car.

Personal Contract Purchase

Compared to HP, PCP (Personal Contract Purchase) is quite different and complex. Firstly, you don’t necessarily pay off the total cost of the vehicle at the expiry of the agreement. This is optional though, not mandatory.

Secondly, PCP is a means of car finance that allows you to easily change your car at regular intervals.  After the initial deposit is made (typically 10% of the car’s value) and a monthly installment spanning a period of 24 to 36 months (2 to 3 years) is covered, you are offered three options at the end of the agreement:

  • Return the car back to the dealer pending your agreed to the terms of maintaining a certain wear and tear and mileage limit
  • Make a full purchase of the vehicle by settling the ‘balloon payment’ (depreciated value of the car)
  • Sign a new agreement for a new vehicle and roll over the ‘profit’ or ‘loss’ (i.e., the surplus or deficit between the agreed future value of the vehicle and the real value at the end of the contract term) into the new deal
  • Hand and over the keys to your car (subject to paying off any deficit)

Which is Right Option for You?

This depends on a number of factors because both HP and PCP come with their own advantages and disadvantages.  The one which is right for you depends on your circumstances.

Advantages of HP

  • You get to keep the car once the agreement expires with no extra charges.
  • Absence of mileage limits.
  • Maintains lower interest rates than other PCP alternatives.
  • Monthly installment is fixed and spread over a long period of over 5 years.
  • Absence of VAT on monthly charges.


Disadvantages of HP

  • There is no guarantee for what the future value of your car might be.
  • Prospect of non-ownership of the car pending its full payment.
  • Interest rates tend to be higher than of its PCP counterpart.
  • There is often difficultly when it comes to selling the car prior the full payment.

Advantages of PCP

  • You have the option to merge service and maintenance costs in the monthly installments.
  • There is an option to change vehicles every few years or return it after the contract has been exhausted.
  • Monthly installments tend to be lower than that of HP (because unlike HP you are not paying off any of the capital value)
  • You can drive the latest models available owing to the small, upfront fee required.
  • Financial risk is mitigated as the full cost of the car isn’t being paid.


Disadvantages of PCP

  • Extra charges are incurred if you exceed the mileage limit.
  • The balloon payment must be settled for the car to be truly owned.
  • High costs will be incurred if the car is returned with considerable wear and tear or damage.
  • Inability to add modifications to the vehicle unless permitted by the finance company.

Regardless of the finance option you choose, what matters is you’re able to acquire the car you desire. HP and PCP both have certain benefits and flaws over each other. All you need do is be mindful of them.

Having the choice of car finance method makes it easier than ever to finance a car purchase.  It is vital to truly understand the differences between the two main methods in order to find the best option for you.