car finance

Car Finance Secrets Every Women Should Know: PCP vs HP

Two of the most popular forms of car finance are hire purchase and personal contract purchase. Both types of finance have the same underlying structure where you borrow money from a lender to fund your car purchase. You then make monthly payments to an agreed term, usually over 3-5 years or until the agreed end date. Both HP and PCP are a great way to help spread the cost of getting a car and enables you to get a newer, better car than you would with cash. It can be hard to know which finance deal is best, but our guide has been designed to help you make your decision a little easier. 

How does PCP work?

PCP car finance is one of the most flexible ways to get a car. PCP is actually a form of hire Purchase, but you have more choice at the end of your car finance agreement. You can finance both new and used cars with PCP and benefit from lower monthly payments than other forms of finance. This is because instead of paying off the value of the car over the loan duration, you instead cover the cost of the depreciation while you use the car. This makes PCP cars a great choice for those who want a newer car but without the high monthly payments. 

When it comes to the end of your agreed loan term, you don’t have to own the car if you don’t want to. You can choose to hand the car back to the dealer, if the car is in good condition and you have stayed within the mileage limit, the agreement has then ended and there is nothing more to pay. If you did want to keep the car at the end of the agreement, you would need to pay the ‘balloon payment’ before you can take ownership. Alternatively, if you don’t want to keep the car, you can also choose to use the equity towards another car on PCP. 

Advantages of PCP car finance:

  • Lower monthly payments
  • More flexibility at the end of the deal
  • Get a newer, better car
  • Fixed monthly payments
  • No deposit needed 
  • Can be suited to all credit circumstances
  • Both new and used cars 

Disadvantages of getting a car through Personal Contract Purchase:

  • Large balloon payment to take ownership
  • Damage charges apply
  • Additional charges for exceeding agreed annual mileage
  • Interest rates can be high for bad credit applicants 
  • Cancelling early can be expensive

Can you end a PCP agreement early?

Car finance agreements usually last between 3-5 years and sometimes life can get in the way of your financial commitments. If you need to cancel your PCP car finance agreement early, you can do so at any time through voluntary termination. You will have to have paid 50% of your total finance, including any additional fees and the balloon payment to be able to cancel your deal early. Most balloon payments will value at thousands of pounds so it can be unrealistic to pay off your balloon payment and finance deal at the same time. If you have paid more than 50%, you won’t be able to be refunded any extra that you have paid either. 

What is hire purchase?

Hire purchase car finance is more straightforward than PCP as you spread the cost of your chosen car into monthly payments with interest. You can finance new and used cars and obtain HP from a dealer, car finance broker or direct from the lender. This means there’s no large final payment to make just a small option to purchase fee, which usually reflects the monthly payments you have been making. HP deals can be spread over 1-5 years but can have higher monthly amounts when compared to PCP agreements. HP can be a better option if you want to own the car at the end of the agreement as you’ve used the term to pay off the whole vale of the car. 

If you have bad credit, it can be easier to secure a hire purchase deal with a specialist lender. The lender owns the car throughout the agreement so if you fail to repay your car finance, the lender can use the car as collateral and take the car away from you. 

Advantages of hire purchase:

  • Fixed monthly payments
  • No mileage limits
  • No damage charges
  • Small purchase fee to keep the car
  • Can hand the car back to the dealer
  • Can be suited to bad credit 
  • Fixed interest rates

Disadvantages of hire purchase car finance:

  • Can lose the car if you don’t pay
  • Monthly payments are based on credit rating
  • Can be expensive if looking for a short-term loan
  • Credit can be affected if you fail to pay

How does voluntary termination work on hire purchase?

If you want to cancel your hire purchase deal early, it is more straightforward than cancelling a PCP deal. If you have paid off 50% off your HP deal, you can cancel your deal with nothing else to pay. This usually happens at around the halfway point of your finance term. If you haven’t yet reached the halfway point, you will need to make a one-off payment to cover the difference.

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