PCP vs HP: Key Differences Explained

Buying a new car outright can be a big drain on your finances. Luckily, there are more than a few ways to help you spread the cost, including Personal Contract Purchase (PCP) or Hire Purchase (HP). In some cases, you’ll be able to split the total amount you pay for your vehicle across several months and still get to own the car at the end. In other cases, you might be able to change your vehicle on a regular basis.

Before you start considering taking any vehicle away on a finance basis, you need to consider the difference between PCP and HP. These are the two main forms of car finance available to drivers in the UK right now. While you may think that all car financing is the same, you’d be wrong!

What’s the difference between PCP and HP?

The main difference between PCP and HP lies in the fact that you get very different outcomes at the end of the process. If you are likely to want to buy a car outright, and don’t have all of the capital available immediately, an HP will let you flexibly purchase a new or used model as you wish. However, PCP will likely let you pay less per month, in exchange for no initial ownership and potential restrictions on mileage and condition.

If you can’t afford to buy a new car outright, always think about spreading the cost. But what should you be looking for when applying for credit? In this guide, I’ll introduce you to hire purchase vs PCP, and will look at some scenarios which might apply to you. Don’t apply for any credit or finance until you’ve read this complete guide!

What is HP and PCP Finance?

HP (hire purchase) and PCP finance are two different ways for car purchasers to spread the cost of running a car. Buying a new car outright can cost tens of thousands of pounds! Therefore, it is only understandable why so many people choose to look at financing.

Both PCP and HP revolve around borrowing money. Think of car finance as being similar to paying off a credit card, or taking out a loan. You’ll have to pay a deposit, and you will need to keep paying monthly agreed amounts. Failure to pay will result in debt collection activity, a black mark on your credit score and, in this scenario, your car taken away from you.

You therefore need to be really careful when it comes to car financing. There are plenty of guides out there which go into the difference between PCP and HP. However, my aim here is to go a little deeper. How might different types of finance affect you? Which are you most prepared to take on?

Whether you choose PCP or HP to run a car, remember that you are tied into a legally-binding contract. You must be able to make payments towards your financing agreement each and every month – no exceptions! It’s therefore worth checking out a car finance calculator to get a handle on your figures. Otherwise, always ask an expert to help you crunch the numbers.

What is HP?

HP (Hire Purchase) financing is seen as a traditional way to spread the cost of paying for a car. It’s a system which has been around for many years, and for plenty of drivers, it’s a viable long-term solution. 

• With an HP, you simply pay an upfront deposit on your new car, and then split the remaining cost across however many months you agree to.
• As with all loans and borrowing, interest will be applied. This is a lender’s way of making money off the deal, and it’s to be expected. This will normally be represented under a figure called APR, or annual percentage rate. This is how much interest you can expect to pay on your whole car, as a percentage, for the whole year. For example, 25% APR will expect you to pay a quarter extra on top, spread across several months.
• As mentioned, you can choose how long you’d like your HP to last for. Obviously, the longer the amount of time you take to pay off, the more you’ll pay. This is due to the interest which applies when you sign up.
• You may also be able to negotiate the deposit you pay. Sometimes, this can be as little as 10% of the overall cost!
• Once you have paid off your final instalment, you will officially own your vehicle.

However, let’s not discount PCP, which is seen by many people as the leading option in modern car financing. But what is PCP, and is it right for you?

What is PCP?

PCP stands for Personal Contract Purchase. It works similarly to an HP in the sense that you still pay a deposit, and still pay monthly amounts with interest applied, but there are some crucial, and rather attractive, differences.

• The crucial difference with PCPs is the fact that you won’t have to own your car at the end of the agreement. You simply return your vehicle to the lender, or dealer, once you’re at the end of your contract term.
• The main attraction in PCPs lies in the fact that, while you won’t have a car at the end of the process, you will likely end up paying for less than you would on an HP. With an HP, you pay for the whole of the vehicle, projected, across a minimum number of months.
• With a PCP, you pay monthly rates on a car as agreed by your lender, but there is more emphasis on flexibility. You won’t be expected to clear the full amount for your vehicle during your chosen contract period.
• You can, however, choose to buy your car outright at the end if you want to. You’ll need to pay a final fee, which is the difference between that which you’ve already paid, and the final cost of the vehicle.

It’s easy to see why so many people choose PCPs over HPs. However, both have their pros and cons when it comes to finance and ownership. What is PCP?  It’s a flexible way to own a car – it’s halfway between renting and buying outright.   

However, some people may prefer to own a car so that they can do what they wish with their vehicle. Do bear in mind, too, that there is a third option – leasing a car.

The Difference Between PCP, HP and Leasing a Car

Before we look at the pros and cons of these different financing options, let’s look closely at the difference between PCP, HP and lease options. You may have been reading thus far and have wondered where leasing comes in – after all, PCP can seem similar. However, dig a little deeper, and you’ll see this isn’t the case at all.

• The main difference between leasing and any type of financing is the fact that there will not be an option for you to buy your car outright. When you lease, the car will always remain the property of the lender.
• This means that certain fees and penalties will apply if your vehicle is damaged (unless you are covered by a maintenance plan alongside). With some PCPs, you may be expected to pay these costs if you choose to give your vehicle back to the lender at the end of the process.
• With leasing, you are almost guaranteed to have mileage caps. This means you will only be able to drive your car so far during your contract period. These can apply when you take out PCP finance, however, if you buy the car outright at the end, it is yours regardless.

Ultimately, the main difference between leasing and financing is ownership. Even if you go into a PCP not thinking you’d like to own your car at the end of the process, you still have the chance to change your mind. With leasing, it is never an option, and it may be considered a little more restrictive.

Hire Purchase vs PCP

At last – let’s get to the meat of the matter, hire purchase vs PCP. As you’ve been reading this guide, you may have already noticed a few of the major pros and cons on either side of the debate. However, let’s break this all down to make things extra clear.

Why Go for Hire Purchase?

• HPs are long-standing options many drivers go for – and are proven to be great at helping people buy the cars they want. There’s no need for you to pay the full cost of your new car upfront.
• PCP contracts will have a number of restrictions in place. For one thing, you will get penalised for wear and tear, and may even be subject to a mileage cap. With an HP, there are no such restrictions. You’ve agreed to buy your car at the end of the process, and therefore, it’s up to you what you do with it.
• If you want to buy a car quickly, an HP is your best option. While you will be paying the full cost of your vehicle at the end of the process, you can choose to spread that cost across a year, two years or more. For example, if you want to buy a car for £25,000 at an APR of 10%, you can do so for under £2000 per month – in a year.
• With hire purchase, you won’t have to pay a final fee at the end if you want to keep the car. With PCP, you will. This is because people generally enter into PCPs purely to run the car, and to think about owning it at a later date.
• HPs are great for drivers who have designs on owning their car outright, but don’t have the money to pay for it right away. You’ll pay more if you choose shorter contract terms, but if you find your dream car and can’t envisage giving it up any time soon, an HP is ideal for you.

Why Go for PCP?

• PCPs make up the vast majority of the car finance market. They are extremely popular, which means some dealers may not be willing to support HPs as an option.
• A PCP will generally let you pay less for your car over time. With an HP, you have to pay for the whole cost of your vehicle during your contract term. With a PCP, you pay a borrowing rate as set by your lender, with APR added.
• The choice to buy your car is entirely yours at the end of the contract period. There’s no pressure, and you’ll simply have to pay the remaining cost if you do decide to retain the vehicle.
• You’ll be able to switch between new cars on a regular basis. You won’t have to deal with the stress of having to sell your car at the end of the process. Simply return your car to the dealership and take out a new PCP on a different model. If you can afford to do so, you could be driving brand new cars every year or so.
• You have better protection against depreciation with PCP. This is because you won’t necessarily be buying your car at the end of the process. Cars will generally lose at least 30% of their value in their first year on the road. Therefore, with HP, you could be left with a car you have to sell – at a fraction of its original value.
• PCPs are likely to be your best option when you are considering a new car. This is because you stand to get the best value from lower monthly payments, and won’t be tied into buying a vehicle outright. You may choose to run a vehicle for a couple of years until you feel you’re ready for another car afterwards.

Conclusion

The main difference between PCP and HP deals lies in the fact that you get very different outcomes at the end of the process – much like with when you have to decide between a company car or a car allowance. If you are likely to want to buy a car outright, and don’t have all of the capital available immediately, an HP will let you flexibly purchase a new or used model as you wish. 

However, a PCP will likely let you pay less per month, in exchange for no ownership and potential restrictions on mileage and condition.

The choice is, of course, absolutely yours – there are pros and cons on both sides.  However, do make sure you look carefully into the exact terms and conditions of any finance deal you like the look of.