What is the difference between PCP and HP car finance options?

What car finance option is right for you?

Do you know your HPs from your PCPs? How about the pros and cons of a personal loan? Car finance can be confusing. Here we look at the options available if you want to buy a car. These are Hire Purchase (HP), Personal Contract Purchase (PCP) and a normal car loan.

What is Personal Contract Purchase (PCP)?

PCP is a car finance option that gives you the use of a car for an agreed period of time. At the end of this you can decide if you want to buy the car, return it or take out another PCP on a different car. With a PCP loan you make monthly payments that cover the car’s loss of value over time. You have an agreed mileage allowance and when the deal comes to an end the car must be worth the agreed depreciated amount

Benefits to PCP finance

If you like the idea of having a new car every few years but don’t want to have to buy and sell, PCP could be a good option for you.

The monthly payments on a PCP can also work out cheaper than on a hire purchase arrangement or personal loan as you are only paying for the wear and tear on the car and are not buying it.

Disadvantages to PCP finance

With a PCP agreement you do not own the car when your deal comes to an end. If you want to buy the car, you’ll have to make a large final payment for it. This is called a balloon payment and can mean you’ll end up paying more for the car than you would have done if you’d taken out a hire purchase agreement.

There are also often more terms and conditions with a PCP than with a hire purchase agreement, such as an agreed mileage limit and charges if you damage the car.

PCP agreements are usually only available on new cars. Whereas hire purchase agreements are often available on new and used cars.

What is Hire Purchase (HP)?

With a HP agreement you buy a car in monthly instalments. You don’t own the car until you make the final payment.

Benefits to HP finance

You can buy a car over time rather than having to find all the money up front. You usually need to put down a deposit and you then borrow the rest of the money and pay this back plus interest in monthly instalments.

Unlike PCP, when you come to the end of your agreement you own the car and can choose to either keep it or sell it.

There is no mileage limit or charges if you damage the car while you are paying for it.

You can use a HP arrangement to buy a new or used car whereas PCP is usually only available on new cars.

Disadvantages to HP finance

The initial deposit and the monthly repayments on the car are usually more expensive than with PCP as you’re buying the car.

If you’re looking to change your car every few years this may not work out as well for you as a PCP agreement.

The longer the finance deal, the more you’re likely to pay in interest.

What are the differences between PCP and HP?

With PCP and HP finance agreements, the loan may be secured against the car. If you do not keep up the repayments this means you could lose the vehicle.

Here’s a breakdown of the key differences between three popular forms of car finance:

Personal LoanHire PurchasePCP
Fixed monthly payments
Own the car from the outset
Deposit required
Annual mileage limit
Early settlement option

How do you get the best car finance deal?

We know that choosing a new set of wheels is a big decision. But picking car finance options can be just as difficult. There are many routes to consider. But we can make it a smoother ride - by helping you shop around to pick the car finance that’s right for you. With Experian, you can check your eligibility for HP deals, PCP and personal loans without impacting your credit score, as well as comparing guarantor loans and offers from car finance brokers. So, you’ll be prepared to pick the best deal when you head to the car dealership.

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How much does a car cost on HP vs PCP?

This will depend on the cost of the car and the interest on the loan.

With HP you’ll need to pay back the amount you borrow plus interest. With a PCP arrangement you’re only paying back the amount the car is expected to depreciate over of the period you have it.

So PCP repayments are cheaper than HP repayments as you are not buying the car.

Is HP or PCP right for me?

It depends. An HP contract can be an affordable way to buy a car. You make your repayments each month and know that at the end of the deal you’ll own the car.

If you want to change your car every few years then PCP may be for you. Your repayments will be lower than an HP agreement for the car and at the end of the deal you can move to a new PCP deal and get a new car.

When would I choose a HP deal?

If you want to buy a car, then an HP agreement is likely to be a better option for you than PCP. With an HP agreement you’ll automatically own the car at the end of your deal. If you take out a PCP deal you will have the option to buy the car at the end of your deal but it’s likely to work out more expensive than if you had taken out an HP deal.

PCP deals also have a mileage limit so if you don’t want to be restricted by this an HP agreement is likely to be better for you.

Also, if you damage the car, with an HP agreement there is no charge for this as you are damaging your own car and not the car finance’s car.

When would I choose a PCP deal?

If you want a new car every few years, then a PCP deal is likely to suit you more than an HP deal.

You also usually need a smaller deposit and have lower monthly repayments on a PCP deal than with an HP deal.

With a PCP deal you don’t have to worry about the car depreciating in value as you simply hand it back to the car finance firm at the end of your deal.

How to compare PCP and HP finance deals

You can usually either sort out a car finance deal with the company you’re getting the car from or you can get finance from a car finance firm. It’s worth checking how much the dealer will charge you and then comparing this with how much a car finance firm will charge you. Many car finance companies have handy calculators on their sites to help you compare the cost of an HP versus a PCP deal.

Is leasing a car better than buying?

Leasing a car is the same as having a long-term rental arrangement on a car. When the lease comes to an end you return the car. This is similar to a PCP arrangement. If you only want a car for a set period of time, this option might suit you.

What other car finance alternatives are available?

Other car finance options to HP and PCP include leasing a car or taking out a personal loan to buy a car. You can find out more about personal loans in our guide.

If you can get a high enough limit on your credit card this could be an option, but you’d probably need several cards to be able to afford this. If you can take advantage of 0% balance transfer deals you would then not have to pay interest on the purchase, but you’d have to make sure you paid off the debt before the 0% deals came to an end to avoid interest payments. Find out more about 0% balance transfer deals in our guide.

Top tips for getting the best deal

  • Compare the cost of finance deals offered by the car dealer with third party car finance firms
  • Compare the APR on deals to find the cheapest loan
  • Think about how long you want the deal for. The longer the deal, the more interest you’re likely to pay overall
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