When you’re looking for car finance for your perfect car, no matter where you shop, there’s two phrases that will dominate your search: HP and PCP. But what are they and which is the best option for your next car?
The answer will depend on your individual circumstances. Luckily both options are fairly flexible, which means that whatever your circumstances, there’s usually a car finance agreement that will fit in with your lifestyle and budget.
Let’s take a look at the pros and cons of HP and PCP to help you discover the best car finance for you.
HP or Hire Purchase is a tried and tested method of paying for your ideal car in manageable installments. The price of the car (and the associated fees and interest) is split into equal monthly payments over a number of months, usually between two and five years. The amount you pay remains the same throughout the contract, for example:
You can choose the length of the contract to fit in with your other financial commitments - the longer the contract, the smaller your monthly payments. Add a deposit of any amount to lower the payments further. In the case of part-exchange, the deposit is the value of the car that you are exchanging. And if you have no deposit at all, most providers will also be able to factor this into the equation.
Throughout the contract you needn’t worry about the number of miles you drive or stress over any little bumps or scratches on the body work. Once you’ve made the final payment on your HP agreement, the car belongs to you, so you can sell it, part-exchange it or continue to drive it without any further commitment.
In recent years, PCP or Personal Contract Purchase has become a very popular method of financing cars that might otherwise be unaffordable. With around three-quarters of all new and used cars being bought using PCP, it’s obviously an attractive option, here’s why…
Like HP, PCP is a flexible car finance plan that allows you to tailor the length of the contract and your monthly payment. Unlike HP, you will not have ownership of the car at the end of the contract, unless you pay a ‘balloon payment’ equal to the minimum future guaranteed value (MFGV), calculated at the beginning of your agreement.
This MFGV, or final payment, is the projected value of the car at the end of the contract. You’ll still pay fixed monthly amounts, making it easier to budget for your car. A deposit is optional and charges for the credit will be factored into these installments. So, payments for a car on a PCP basis might look like this:
In contrast to HP, your installments won’t necessarily reduce in proportion if you choose a longer plan. This is because with a PCP deal, you’re paying off the depreciation, or drop, in value of the car so the longer you have it, the more its value may fall, resulting in a larger total amount to pay. For this reason, you might find that for some brands or age of car, there will be little difference between a three or four year PCP plan as the re-sale value of the car continues to decrease.
So, while the payments on a HP agreement might be roughly halved when the period of the agreement is doubled from 24 to 48 months, this will almost certainly not be the case with a PCP agreement:
When a PCP agreement has run its course, there are three options - make the final balloon payment for full ownership, return the car to the dealership and walk away, or trade it in for another car with a PCP agreement. In the third case, if your car is valued above the original MGFV, the excess will be used as deposit on your next car. If the car isn’t worth the MGFV, there will be no penalty.
However, unless you decide to keep the car, you must return it in a good condition - this means repairing any damage (or paying the dealership to do this) as well as sticking to an annual mileage limit. You may have to pay a cost per mile for any distance travelled over and above this limit. This will be outlined at the beginning of your contract in the PCP documentation.
There’s no definitive answer. It really does depend on your own circumstances and what you want to get out of your car. If outright ownership is a priority, then HP is the one for you. If you like to change your car every two or three years and/or need low payments, then PCP is the way to go.
Both HP and PCP allow you the option of finishing the contract early by requesting a settlement fee, and both loans are not secured on your property - default on the payments and the most you’ll lose is the car.
Some people struggle with making payments over several years and having nothing to show for it, so prefer HP. Others are happy to effectively pay for the use of the car and happily surrender it at the end of the contract and start all over again with another, newer car and a new PCP plan, with the added bonus of the option to buy outright if circumstances change.
Still not sure whether HP or PCP is right for you? Pop in to see us at Autostore for a no-obligation chat and we’ll help you to iron out any creases, allowing you to hit the road in any one of our fantastic range of used cars in no time.