Personal Contract Purchase vs Hire Purchase: which is better?

The two most popular forms of car finance in the UK are Personal Contract Purchase and Hire Purchase and for many drivers, it can be hard to choose between the two. Car finance has become even more popular in the past few years with the cost of living on the rise and the price of new and used cars being some of the highest we’ve seen; it’s no surprise drivers want to help spread the cost! The guide below looks at car finance in more detail and if you would be suited to Hire Purchase or PCP car finance deals. 

Why choose car finance? 

Car finance enables drivers to spread the cost of owning a car into affordable monthly instalments. If you can’t afford to fork out one big lump sum to buy a car, finance is a great way to spread the payments over a number of years. For many drivers, it means that you can get a newer, better car than you would using cash alone and pay for it over a term that suits you. It’s worth remembering that car finance is never guaranteed, and you will need to meet the lenders criteria and pass car finance checks first before you can receive a car finance approval. There are a number of car finance agreements to choose from and the most popular tends to be a PCP car finance deal and a Hire Purchase agreement. 

What’s the difference between PCP and HP?

There are many benefits to both HP and PCP car finance deals UK but you may be better suited to one form of finance over the others depending on what you want from your agreement and your personal circumstances. 

How does hire purchase work? 

Hire purchase is a form of secured loan which means the lender owns the car until the final payment has been made. You choose a car you would like to finance and if accepted by a lender, the lender buys the car from the dealership, and you make equal monthly payments to the value of your chosen car over the course of an agreed term. You can choose a loan term length that suits your budget, but payments are typically spread over 3-5 years. Your monthly payments will also include interest and any other fees too so choosing the lowest interest rate is important. Once all payments have been made on time and in full and the agreement has reached the end, you can pay a small option to purchase fee to take ownership of the car. You can then own the car and there are no more payments to make. 

Who is hire purchase for? 

Hire purchase is designed for those who want a straightforward car finance deal and want to spread the cost of the car into equal payments with the intention of owning the car at the end of the deal. Hire purchase can also be suited to people with low credit scores as the lender owns the car throughout the agreement. Bad credit applicants are more likely to default on their loans based on evidence from their previous borrowing history and if they fail to stick to the rule of the agreement, the lender has the right to withdraw the car. 

Benefits of hire purchase car finance: 

• Low or no deposit needed. 
• Fixed interest rates so you know what you’re paying. 
• Fixed term length. 
• You can own the car at the end of the agreement.
• Options to pay off the loan early. 

What is Personal Contract Purchase?

Personal Contract Purchase (PCP) is a form of hire purchase, but it has a completely different structure. Instead of paying for the full value of the car, you instead make monthly payments to cover some of the value and much of the cost is differed until a final balloon payment. This helps to make monthly payments lower, and you also have more options at the end of the agreement. If you wish to keep the car, you can pay the large balloon payment or find a lender to refinance the balloon payment. If you don’t wish to keep the car, you can simply hand the car back to the dealer, as long as it is in good condition, and you do not exceed the agreed annual mileage which is set at the start of the agreement. You can also choose to use the value of the car to go towards getting a new car on PCP too.

Who is suited to PCP finance? 

Most drivers use PCP as it is a flexible form of finance, and they have the ability to get a new var at the end of the deal. Usually, PCP car deals are suited to people who like to change their car regularly and aren’t precious about owning the car. Usually, the balloon payment at the end of the deal is a lot of money to pay and for many drivers it’s unrealistic to own the car this way. 

Benefits of Personal Contract Purchase: 

• Lower monthly payments.
• Change your car more regularly.
• Can make new cars more affordable. 
• 0 deposit options available.
• Low interest rates. 
• A flexible form of car financing.