The most common forms of car finance are Hire Purchase (HP) and Personal Contract Purchase (PCP). In a nutshell, HP is probably more suitable if you plan to own your new car outright while PCP may be better if you’re unsure whether you might want to change it after a few years.
Like all forms of personal finance, you should carefully consider whether you can afford the monthly payments before you sign a contract. Cash purchases will always be an alternative and could suit your individual circumstances better.
What is HP finance?
Hire purchase is one of the simplest forms of personal finance. The cost of the new car is broken down into a deposit and a series of monthly payments, plus interest. Once you’ve paid the final instalment, the car will be yours to keep or sell on.
What is PCP finance?
PCP finance splits a percentage of a car’s price into monthly payments and a deposit. You’ll replay this amount over a set period after which you can either return the car to a dealer or buy it outright in return for an optional final payment.
Generally speaking, PCP monthly payments tend to be less than HP because some of the car’s value is deferred to the optional final payment. If you intend to change your car after just a few years – or you’re worried about the effects of steep depreciation – PCP may suit you better. This is because once your agreement ends you can simply return the car to a dealer without having to sell it on yourself.
HP deals usually come with a larger deposit than PCP offers but you’ll not have to worry about paying a sizeable final fee if you’re sure you want to keep the car. Once you’ve made the final payment, you’ll be the car’s legal owner.
Most HP and PCP agreements will come with a set amount of interest that’ll be included in your monthly payments. HP agreements are typically spread over a longer period than PCP – as a result, you may find yourself paying more interest than if you’d signed a PCP deal.
PCP finance comes with the option to return the car to a dealer so you’ll have to agree to more terms and conditions than an HP finance alternative. A dealer will set out the number of miles you’ll be allowed to cover and the condition the car must be in when it’s returned. If you exceed this mileage – or return the car with numerous bumps and scrapes – you may be liable for potentially hefty penalty charges.
A PCP agreement’s optional final payment is equal to what finance companies call the car’s Guaranteed Minimum Future Value (GMFV). This amount is determined before you sign an agreement. If you’ve decided you want to keep the car after your finance term has ended, the optional final payment amount won’t change – regardless of whether the car’s worth more or less than its GMFV.
If you decide to pay the optional final payment, it can be re-financed in a similar manner to an HP agreement. The payment amount will be split up into a further series of monthly payments but you won’t have to fork out for another deposit.
Once you’ve paid back more than half of the original finance amount – whether it’s HP of PCP finance – you’ll have the option to ‘voluntarily surrender’ the vehicle. If you tell the finance company you no longer want the car, you can arrange for it to be collected and you’ll not have to make any further payments. This is part of your statutory rights and won’t affect your credit status.