PCP vs HP Car Finance: Which Option is Right for You?

Personal Contract Purchase (PCP) and Hire Purchase (HP) are two popular ways of financing a new car in the UK. But which one is better for you? Here is an overview of the key features and differences between PCP and HP to help you decide.

What is PCP?

With a PCP agreement, you essentially hire the car for an agreed period, typically 2-4 years, by making monthly payments. At the end of the term, you have three options:

1. Return the car without owing anything further, apart from damage and excess mileage charges.
   
   
2. Use any equity you may have built up as a deposit to get a new PCP deal on a replacement car.
   
   
3. Pay the optional final “balloon” payment to own the car outright.
   
   

A key benefit of PCP is that monthly payments are lower than with HP because you are only paying to cover the car’s predicted depreciation during the term along with interest, not the full purchase price. You also get the flexibility to change cars more regularly.

What is HP?

An HP agreement is essentially a loan that you take out to purchase the car. You agree to repay the full amount plus interest in monthly instalments over a defined period, usually 3-5 years.

Once you have finished making all payments, you own the car outright with no further financial commitment apart from insurance, tax, and maintenance costs. An HP agreement does not involve any final “balloon” payment option.

Key differences between PCP and HP

• Higher Deposit - PCP deals usually require a higher deposit or initial payment, often 10-30% of the car’s value compared to 10% or less for HP. 
  
  
• Monthly Costs - Monthly repayment amounts are lower for PCP than HP, making the deals more affordable for cash flow. But you do not own the car during or at the end of the PCP term.
  
  
• Mileage Limits - PCP contracts have annual mileage restrictions, typically 10,000-15,000 miles. Excess mileage charges can be costly if you go over the limit. HP deals have no mileage restrictions.
  
  
• Ownership - With PCP, you only own the car if you decide to pay the final “balloon” payment which may not be affordable. An HP agreement means you own the vehicle once paid in full.
  
  
• Early Termination - Ending your PCP early typically involves paying hefty termination fees. You can settle an HP agreement early with lower charges.
  
  

Which Option is Best?

If you want lower monthly costs and plan to change cars every 3-4 years, then PCP is likely the better choice. The mileage limits may work well if you do not expect to drive long distances. Just be prepared to budget for the final payment or return the car.

HP makes more sense if you want to own the car at the end without balloon payments. As you own the vehicle, you can keep driving it after the finance term without further costs or restrictions based on mileage. This option gives you greater long-term value.

In summary, PCP enables cheaper monthly payments but HP leads to ownership once the loan is repaid in full. Consider your budget, mileage needs and plans for the car before deciding which finance option fits your situation best. Getting quotes from dealerships on both PCP and HP terms can also help inform your decision when taking out car finance.