PCP vs HP: Choosing the Right UK Car Finance Option

Buying a new car is an exciting time, but also a major financial commitment. With the variety of finance products on offer, it can be tricky to decide which option best suits your needs and budget. Two of the most popular ways of financing a new car purchase are personal contract purchase (PCP) and hire purchase (HP). But what exactly is the difference, and which one is likely to be more suitable for you? This guide breaks it down for in simple terms to understand, with no complicated lingo.

What is PCP? 

A PCP, short for personal contract purchase, allows you to pay for the depreciation of the car over an agreed term, typically 2-4 years. You put down a deposit, usually 10-20% of the car’s value, followed by lower monthly payments spread across the term. At the end of the agreement, you have three options:

1. Pay the optional final “balloon” payment to own the car outright. This is calculated based on the car’s predicted value.
2. Use any equity in the car as a deposit for another PCP on a new vehicle. This transfers the debt onto the finance for the next car. 
3. Simply return the car to the lender (the finance company) with nothing further to pay, providing it meets the agreed mileage and condition requirements.
   
   

PCP advantages:

• Lower monthly payments than HP or leasing.
• Get a new car more frequently, usually every 2-3 years.
• No responsibility to sell the car at the end of the agreement.
  
  

What is HP?

Otherwise known as “hire purchase”, this option allows you to pay for the full value of the car in monthly instalments spread over 1-5 years, along with an initial deposit and an option to purchase the car. Once you have made all repayments, including the option to purchase, you own the car.

HP advantages: 

• Build equity in an asset you own outright at the end.
• Modify or customise the car however you wish.
• No restrictions on mileage or condition at the end.
  
  

Key Differences

Upfront costs: 

The PCP deposit is usually lower than the HP deposit. However the HP monthly payments are typically lower.

Ownership:

With PCP you do not own the car until the final payment. With HP you take full ownership once all installment and fees are paid.  

Mileage limits: 

PCP agreements come with annual mileage restrictions, usually of between 8,000 or 15,000 miles per year. Excess mileage charges can be costly if you surpass this allowance. HP does not have any mileage restrictions. Some manufacturers charge up to 19p a mile over.

Which Option is Right For You?

How long you want to keep the car:

If you’re the type who gets itchy feet after a few years and always has your eye on the latest model, PCP may be your best bet. It allows you to flip into a new car more frequently. If you want to run a car into the ground over many years, then HP provides that ownership flexibility.

Driving habits and requirements: 

Those with high annual mileage should steer clear of limited PCP mileage contracts and opt for unlimited HP instead. However, if condition and upkeep are not your forte, the responsibilities of maintenance and reselling with HP may outweigh the restrictions of PCP return conditions. 

Financial situation:

Typically PCP suits buyers on tighter budgets due to lower monthly payments. But it means you don’t build any equity in the car with payments over time like you do with HP. At the end, all you’re left with is the option to pay the balloon payment or start over again. If you have the means, HP provides an asset you fully own.

In Summary

PCPs allow frequent upgrading and lower monthly costs. But monthly payments don’t build equity and excess fees can bite for high mileage drivers. 

HP enables full ownership with no restrictions, however requires higher ongoing payments and the responsibility of selling or maintaining the car long-term.

Analysing your budget, intended car usage, typical ownership periods and future plans will determine whether PCP or HP is the most suitable finance product for your next car.