When it comes to car finance, a standardised approach doesn’t always work. Every motorist is different, which is why lenders offer a variety of models, including personal contract purchase (PCP) and hire purchase (HP). Both are hugely popular in the UK and used to finance everything from budget-friendly hatchbacks to luxury EVs.

Each option offers unique benefits, so how do you decide which is right for you? In this comprehensive guide, we’ll cover everything you need to know about PCP vs HP, including how they work and the key differences between the two financing options.

Understanding the difference between HP and PCP finance

Let’s start with a breakdown of each financing option:

Personal contract purchase (PCP)

In a personal contract purchase agreement, the goal isn’t to own the car outright. Instead, you effectively rent it for a set period, typically two to four years. Your monthly payments cover the car’s depreciation over this period, as well as interest.

At the end of a PCP finance agreement, you have three choices:

  1. Return the car
  2. Trade in the car for a new model, moving into a new car finance agreement
  3. Make a large balloon payment to buy the car outright

Balloon payments are lump sums agreed on at the start of your contract and calculated using the guaranteed minimum future value (GMFV) of the car. The minimum guaranteed future value indicates how much a car will be worth by the end of a PCP finance agreement. Making the final balloon payment means paying off this amount to own the car for good.

Hire purchase (HP)

Hire purchase is a more straightforward type of car finance and puts you on a direct path to owning the car outright. The total cost of the car, minus any deposit paid upfront, is spread over fixed monthly payments for a hire purchase agreement. Once you make the final payment, the car is yours to keep. There’s no need for a balloon payment at the end of the contract and you don’t have the option to return the vehicle. If ownership is your end goal, HP finance is a great option.

PCP vs HP: how the two compare

Now you know more about how each auto finance model works, let’s take a look at how they shape up against each other.

Ownership

PCP finance offers flexibility but stops short of ownership unless you’re willing to make a final balloon payment. As mentioned earlier, you can choose to return the car at the end of the agreement. This makes PCP an attractive option for motorists who love to upgrade to a new model every few years.

The option to own is an important difference between HP and PCP. Once the final payment is made on a HP agreement you become the legal owner of the vehicle. This makes HP finance ideal for motorists with long-term ownership goals.

Monthly payments

Lower monthly payments are one of the top benefits of PCP. They’re generally lower than HP payments as you’re covering the car’s depreciation, not its full value. This is due to the balloon payment, which covers the actual car cost should you want to buy outright.

Monthly payments are higher for HP agreements as you’re paying off the entire cost of the car, plus interest. You may prefer to save money with PCP finance compared to HP repayments and put money aside for the final lump sum.

Balloon payment

The need for a balloon payment at the end of a PCP agreement can catch some motorists off guard. As explained above, it covers the cost of the vehicle which isn’t included in PCP repayments. It is optional though, so you can choose to move to a new PCP finance deal with a car upgrade or just return the vehicle.

In comparison, monthly payments made on HP agreements are designed to cover the full cost of the car which means you won’t be hit with a lump sum at the end of your contract.

Mileage limits

PCP agreements often come with mileage restrictions, with additional charges incurred for exceeding your car’s mileage cap. The reasoning behind this is that the finance company wants to protect the value of new cars in case they’re returned at the end of the agreement. It’s well known that higher mileage means lower value, especially for newer cars.

Your mileage limit will typically be from 5,000 to 10,000 miles per year. This can make PCP limiting for high-mileage motorists. However, going over the agreed mileage limit doesn’t mean you can no longer use the car – it simply means you’ll pay extra charges (which will be outlined in your PCP agreement).

With HP, you’re free to drive as much as you like without worrying about mileage restrictions or penalties. That’s because, all being well, you will be the eventual owner of the car at the end of the HP finance term. For many motorists, this freedom makes the HP vs PCP decision easy.

Customisation options

Since you’re essentially leasing the car in a PCP agreement, there may be restrictions on customisations. That’s because the finance company may be getting the car back at the end of your term. It makes it harder for them to lease or sell it if it has custom features.

HP gives you the freedom to modify your vehicle. Whether it’s a custom paint job, tinted windows, tech upgrades or seating configuration, this is a big difference between HP and PCP. If you like to customise cars, hire purchase agreements are probably the car finance option for you.

Similarities between these two car finance options

While these two types of car finance have their differences, it’s worth noting the ways in which they’re similar too. These include:

Manageable monthly payments – Both PCP and HP finance make it more affordable to drive a new car, breaking down the cost into monthly repayments.

Term length – When comparing car finance options, PCP and HP finance both have similar repayment terms. You can typically expect to make monthly payments for 3-5 years, though shorter and longer deals are available.

Initial deposit – PCP and HP finance both require an initial deposit in most cases. This reduces the amount you’re borrowing which results in lower monthly payments. A smaller deposit will result in higher monthly instalments and could even affect the interest rate you’re offered.

New cars – Both of these options make it practical to drive a new car. Rather than facing one big lump sum, you’ll break the cost down into manageable monthly instalments. However, you can use PCP and HP for both new and used cars.

The bottom line on HP vs PCP

Ultimately, there’s no hard and fast answer when it comes to the PCP vs HP debate. What’s best for you depends on your individual preferences, financial situation and driving habits. PCP offers flexibility, affordability and options at the end of your contract, while HP prioritises ownership. Be sure to factor in your long-term plans when deciding and consider how each option aligns with your personal goals.

Need a hand deciding which option is right for you? At My Car Credit, we pride ourselves on offering friendly, personalised support to British motorists. This includes helping you understand the difference between HP and PCP. As well as PCP and HP, our team can get you up to speed on other popular car finance options, including conditional sale and personal contract hire (PCH).

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