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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.    

Across the car industry, you will find very few motorists buying new and used vehicles with real cash. This is because there are now more finance options than ever before, allowing motorists to enjoy greater flexibility and spread the cost of a vehicle across low monthly payments.

There are two main finance available - Hire Purchase and PCP. The main difference between these two finance options is that, if you choose HP, you will own the car at the end of your finance term, whereas if you opt for PCP, you can either choose to hand the car back or pay a balloon payment determined by the final purchase price of the car.

Here's our guide to choosing the best type of car finance for you.

Types of car finance available

  • Hire Purchase (HP)
  • Personal Contract Payment (PCP)
  • 0% Finance
  • Leasing

The difference between HP and PCP - Which car finance is best?

Whether you choose HP or PCP, you will be expected to put down an initial deposit, usually around 10%. You will also be expected to commit to monthly payments over a set term.

The finance agreement you sign up to will depend on the cost of the car, the length of the contract, and the amount of deposit you put down. Remember, the more deposit you pay, the lower your monthly payments will be.

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. 

So, what is the main difference??

If you opt for a PCP finance agreement, your monthly payments will essentially equate to the decrease in value of the car over the term you take out your agreement. At the end of a PCP agreement, you can either give the car back or you can pay the balloon payment, which is what the car is now worth.

However, if you choose to opt for a Hire Purchase finance agreement, the amount you will pay on a monthly basis will cover the cost of the car, and the vehicle will be yours to keep with no extra cost at the end of the agreement.

As the car is not yours unless you choose to make the optional final payment at the end of the PCP agreement, you will find that PCP monthly payments are far less than HP payments. This is definitely worthwhile bearing in mind if you're trying to keep your monthly outgoings to a minimum.

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.

HP or PCP what's 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.

Choose PCP car finance if...

If you're working with a tight budget or you're looking to keep your monthly car outgoings as low as possible, PCP finance is definitely the better option.

This type of finance offers far more manageable payments and cheaper short-term costs, meaning you can access the latest used car makes and models, without breaking the bank.

PCP's single biggest advantage is you can usually get a better car for your monthly budget and it's easier to change cars more regularly than with HP.

Choose HP car finance if...

If you're looking to purchase a car outright. Hire purchase is one of the best ways to spread the cost of a vehicle over a set amount of monthly payments. And you won't have to worry about a balloon payment at the end.

Car finance at Carbase ?

Here at Carbase, we keep car finance simple to understand and quick to apply for, and we also offer financial solutions for those drivers with bad credit.

For example, as well PCP options, we also offer Hire Purchase finance, which has been designed to offer affordable monthly car finance payments with a fixed interest rate.

All that is required is a deposit and your terms can even be adjusted to suit your financial situation based on your circumstances. The finance will still be against the vehicle and the agreement can be settled at any time. And at the end of the agreement term, the vehicle will be yours!

Need help with any part of the car buying or PCP and HP finance process? Get in touch with our expert team today! Our friendly, professional and helpful team is always on hand to help.

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