HP or PCP Finance? A Comprehensive Comparison

Finding the right car for your needs, budget, and lifestyle can be challenging at the best of times and, when it comes to choosing the right car finance, well things can get downright complicated. However, would you be surprised to learn that it really doesn’t need to be that way?  You’ve probably already heard the terms HP and PCP before – right?  In short, these are two very common types of car finance available when buying a new or used car – the former is basically a straightforward, good old-fashioned car loan, with the latter being a more complicated form of Hire Purchase. Finance made simple is what we are all about here at Vendor Finance – so what is HP? What is PCP? And which one is best for you?

What is Hire Purchase?

Hire Purchase has traditionally been one of the most commonly used forms of car finance for one reason – it’s as straightforward as it gets!  You decide how much of the car’s cost you want to borrow and for how long you wish to borrow it for, and you pay it all off over your chosen finance term in equal monthly installments.  Any interest the finance company charges for lending you the money is included in your monthly repayment, which remains fixed throughout the term of your loan.

Depending on the finance company used, coupled with your own personal circumstances and credit history, full finance options may be available to you however a deposit of 10% – 20% of the cost of the car is more typical.  Your deposit can be made up of cash, a trade-in, or a combination of the two. 

 Under a HP agreement, finance terms typically range between 3-5 years.   The longer the term, the lower your monthly repayment as you are spreading the borrowed amount over a longer period of time.  However, keep in mind that the longer the term, the more interest you will pay over the life of your loan.

 

Hire Purchase advantages and disadvantages

Pros

• Simplicity – it does what it says on the tin!
• Once the final payment is made under the agreement, you own the vehicle.  There is no balloon payment.
• The interest rate is fixed throughout the finance term, making it easy to budget your finances.
• Depending on the year of the car, you can tailor the length of the finance agreement to suit your needs
• Relatively easy to get out early, if you wish to upgrade the car before the end of your finance term
• No restrictions to servicing or mileage clauses

 

Cons

• As you finance the full cost of the car (less any deposit/trade-in) over the finance term, monthly repayments tend to be higher than those seen under a PCP agreement
• The lender is the legal owner of the car while you are making your repayments.  If you do not keep up with the repayments on the loan, the car can be repossessed by the finance company, which in turn can affect your ability to access credit in the future

 

What is Personal Contract Purchase (PCP)?

PCP is a specific type of hire purchase, just slightly more complicated. The main difference between a PCP and HP agreement is how the monthly repayments are structured.  Under a PCP agreement, there are three core components:  1) the initial deposit, 2) the borrowing amount, and 3) the final payment.  This final payment is often referred to as a Balloon Payment and is associated with a Guaranteed Minimum Future Value (GMFV) and together, they are the real key to how a PCP agreement works.

Calculating the GMFV adds another layer of complexity to this product.  The dealership will do this for you, but it’s essentially a calculation of how much your car will be worth (as a minimum) at the end of the finance term you have opted for, so at the very beginning, you will need to decide how many kilometers per annum you’re going to drive and what optional extras, if any, you would like for the car.  The GMFV will, for all intents and purposes, be your balloon payment at the end of the finance term, so it’s an important figure.

 

At the end of your PCP agreement, you have three options to choose from:

1. Hand back the vehicle. You simply walk away with no further obligation under the agreement or cost to yourself.
2. Pay off the GMFV amount – This will clear the loan in full meaning you will own the car outright with no further payments.  Alternatively, if you love the car but cannot pay the GMFV, you can opt to refinance the amount under a new finance agreement.
3. Trade-in your car – the dealer will value it as normal and any equity (the difference between the valuation amount and the GMFV amount) carries over as a deposit for your next vehicle under a new agreement.

 

PCP agreements are most popular with new car purchases and finance terms are typically three years, although longer terms are available.  As you only finance part of the car’s cost, the monthly repayments tend to be quite low, especially when compared to those payable under a standard Hire Purchase contract.

 

PCP advantages and disadvantages

Pros

• Within the deposit range allowed (typically 0% – 35% of the cost), you choose a deposit that suits you and your budget.
• Rates tend to be more competitive than those offered under HP
• Monthly repayments are often lower than a HP contract as you are borrowing less
• A newer vehicle can decrease maintenance/running costs
• Option to upgrade to a new car under a new contract, at the end of the finance term

 

Cons

• Once you get into a PCP contract, it can be difficult to get out early
• The terms and conditions are restrictive: e.g. low mileage allowance, full-service history, and no damage beyond normal wear and tear.
• The penalties incurred for exceeding the T&C’s can be quite substantial
• Balloon payment falls due at the end of the finance term
• At the end of the finance agreement, if your car is valued at the GMFV figure only, you will have no equity from the deal to put towards the purchase of a new car on another agreement.  Likewise, if your car is valued below the GMFV figure, you will need to make up the difference to the dealer.

 

Should I choose HP or PCP?

It really does boil down to your own personal preference –  do you like to drive a newer car, changing it every 3 years for the newer model or do you prefer to purchase a car and hold onto it?  Perhaps the idea of having a significant balloon payment at the end of the finance term scares you?  If the former, then PCP is definitely worth considering – its flexible & cost-efficient.  Just be sure you stay within all the mileage restrictions etc to get the most out of the arrangement.  However, if you fall into the latter category, then HP may be just what the doctor ordered. 

 

As a finance broker, Vendor Finance aims to demystify the finance process, cutting through the technical jargon to help you make a choice that suits your personal circumstances.  We offer HP finance options via our panel of lenders, so if you are in the market for a new car, a ‘new-to-you’ car, or simply want to upgrade your existing one, why not give us a call today?  Our experienced and friendly team are available on 071 9310137 or at info@vendorfinance.ie – or simply click here to get started.