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HP vs PCP - Which type of car finance is best?

HP vs PCP - Which type of car finance is best?

It's time to upgrade your run-around to something altogether more eye-catching, economical and reliable, but what's the best way to pay for your next car?

Car finance is designed to help you spread the cost of car ownership with a timeframe and repayment plan to suit you. However, while it makes buying a used car affordable, weighing up the different finance options available can be perplexing.

Hire Purchase (HP) and Personal Contract Payment (PCP) are the most popular types of car finance agreement, and we offer both at Carbase. In most cases, both HP and PCP include an initial deposit payment, followed by a loan against either all or part of the remaining value of the car.

The type of car finance that's right for you will depend on several factors, but comparing the two directly can help you work out which to go for. With that in mind, we've created the table below to compare the features and finer points of HP and PCP car finance.    

First though, let's summarise exactly what HP and PCP are.

About Hire Purchase (HP) car finance

A Hire Purchase (HP) finance agreement works by providing a loan that equals the total value of your new used car, minus the amount of your initial deposit. You pay back HP finance through monthly repayments at a fixed interest rate, over a pre-agreed term of one to seven years.

Our HP deposits tend to be around 10% of the total value of the car but, as we understand the importance of car finance that suits our customers' needs, we pride ourselves on our flexibility. Obviously, the more deposit you pay upfront, the smaller your monthly repayments, although we may be able to offer 0% deposits in some cases. Once you have made all the repayments plus a final purchasing fee, you will own your car outright.

We also offer HP for commercial vehicles, take a look at our blog on commercial van ownership to find out more.


 

About Personal Contract Payment (PCP) car finance

With a Personal Contract Payment (PCP) car finance plan, you have more flexibility when it comes to what happens to the car at the end of the agreement. The amount you borrow is considerably less than the total value of the vehicle minus your deposit - meaning that you pay less per month on a smaller car loan. You can reduce your PCP repayments by paying a larger deposit, and also by keeping your mileage low. 

PCP effectively defers part of the repayment until the end of the agreement. With PCP car finance, you have three options:

  • You can pay a final balloon payment in order to own your car outright,
  • You can choose to not pay the final payment and return your car, or
  • You can part exchange it for a new one.

As you'll have the opportunity to return your car at the end of the PCP term, it's especially important to look after it. As it affects the value of the car, you will need to agree a forecasted annual mileage at the outset of your agreement - exceeding this can come with extra fees. 

 

HP vs PCP comparison 

Here's how our HP and PCP car finance measure up when directly compared.

Will I need to pay a deposit?

Hire Purchase (HP)

In most cases, yes. Usually around 10% of the car's value. A £0 deposit may be possible, but your repayments will be higher.

Personal Contract Payment (PCP)

In most cases, yes. Usually around 10% of the car's value. A £0 deposit may be possible, but your repayments will be higher.

How much will I be borrowing?

Hire Purchase (HP)

HP finance equals the total value of your new used car, less your deposit.

Personal Contract Payment (PCP)

PCP finance equals only a portion of the total value of your new car, less your deposit.

How much will my monthly repayments be? 

Hire Purchase (HP)

Usually more than PCP repayments, as you are borrowing the total value of the car.

Personal Contract Payment (PCP)

Usually less than HP repayments, as you are borrowing only a portion of the value of the car.

Can I adjust the finance plan duration? 

Hire Purchase (HP)

Yes, you can tailor your HP finance plan from one to seven years.

Personal Contract Payment (PCP)

Yes, you can tailor your PCP finance plan from one to five years.

Will there be a balloon payment at the end of the agreement? 

Hire Purchase (HP)

No.

Personal Contract Payment (PCP)

Yes - if you want to own the car outright

Will I automatically own the car at the end of the agreement? 

Hire Purchase (HP)

Yes - once you've made the final payment, the car will be yours. 

Personal Contract Payment (PCP)

No - not until you pay off the rest of the value of the car in a final balloon payment.

Are there any other options open to me at the end of the plan? 

Hire Purchase (HP)

Once the car is yours, you can choose to keep it, sell it or trade it in.

Personal Contract Payment (PCP)

If you don't want to buy the car outright, you can return it to the dealer or part exchange it for a new one.

Can I settle early? 

Hire Purchase (HP)

Yes. You can settle your HP agreement at any time with no penalty.

Personal Contract Payment (PCP)

Yes, although you will need to pay a settlement figure in addition to a final balloon payment, if you want to buy the car.

Will there be any extra charges? 

Hire Purchase (HP)

No. You will pay the same repayment amount each month, at a fixed interest rate.

Personal Contract Payment (PCP)

Possibly. If you are returning the car, you may have to pay a penalty if you exceed your pre-agreed annual mileage prediction, and if there is any non-wear-and-tear damage.

Anything else I should know? 

Hire Purchase (HP)

A HP finance plan is against the car itself, so other lines of credit may still be open to you.

Personal Contract Payment (PCP)

PCP car finance agreements are based on a minimum future value, so you get a guaranteed trade-in or resale value.

So, which type of car finance is right for me?

Choosing between HP and PCP car finance ultimately comes down to your own personal circumstances, and how you want to approach car ownership.

If you want to upgrade your car on a regular basis, a PCP finance plan may suit you better, since it enables you to trade your car in for another while keeping monthly repayments down.

But, if you'd rather own your new used car at the end of your finance agreements without a large balloon payment, HP finance could be for you. HP finance tends to be easier to access too, even with a poor credit score.

Of course, our friendly team are on hand to talk you through your car finance options here at Carbase, and we've also put together a great range of informative blogs about car finance. We make it our mission to help our customers secure finance that not only gets them a used car they love, but that suits their budget perfectly - get in touch with us today to get started.

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