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Carfinanceplus.com guide explains two of the most popular ways to finance your vehicle to help you decide which is right for you – Hire Purchase (HP) and Personal Contract Purchase (PCP). When buying a new vehicle, the most likely car finance choices you will be offered are Hire Purchase (HP) or Personal Contract Purchase (PCP). Both options have similar terms and also there are differences to consider when deciding which option to choose.
Car finance types
|Hire Purchase (HP)
||Personal Contract Purchase (PCP)
|HP means the cost of your vehicle is spread over a period of time, usually a maximum of five
years, with the addition of an agreed interest rate. There is usually a 10% deposit of the value of the vehicle to pay upfront and zero deposit HP car loans may be available. The car is yours once you have made the final installment.
|PCP is similar to HP, wherein you make regular payments to pay off your vehicle loan, but you defer what’s known as a “balloon,” “residual” or “guaranteed future value” amount – essentially a lump sum – until the end of the agreed loan term, up to a maximum of four years. You pay the balloon payment at the end of your finance term.
|How does Hire Purchase work?
||How does Personal Contract Purchase work?
|Hire purchase remains one of the most common ways of being able to afford a new or used vehicle. Typically, you put down a low deposit (or sometimes zero deposit) on the car and then hire the car with the option of buying it outright at the end of the agreed term. The car loan can be arranged for between 12 and 60 months and the amount you pay each month will depend on the total amount you borrow, plus the length of time you want to repay the money.
||PCP is a car loan scheme where you pay a small deposit followed by a set monthly sum over an agreed period of time, typically two to four years. At the end of the term, you can choose to hand the car back without incurring any further costs. You also have the option of part exchanging the vehicle for a new PCP deal, or you can buy the car by making what is known as a balloon payment. This scheme is great if you want lower monthly payments.
|Fixed monthly repayments
||Fixed monthly repayments
|What is the car loan repayment period on HP scheme?
||What is the car loan repayment period on PCP scheme?
|Hire Purchase finance scheme repayments period is between one and five years.
||Personal Contract Purchase finance scheme repayments period is between one and four years.
|Car finance deposit
||Car finance deposit
|The deposit for a hire purchase car loan is normally 10% of the vehicle value.
||The deposit for a personal contract purchase car loan is normally 10% of the vehicle value.
|Hire purchase finance example
||Personal contract purchase finance example
|You want to arrange hire purchase for a used car and, having paid your deposit, want to borrow £10,000 over a 48 month period. Monthly payments would work out at £233, meaning you’d pay £11,196 back in total, at 5.8% APR. Spreading repayments for the same amount over 60 months, would reduce your monthly instalment to £191, and you’d pay £1,502 in credit in total. Buying a car on hire purchase gives you the flexibility of managing your costs to suit your pocket.
||Your monthly sum is based on the retail price of the car at the start of the agreement, and an estimation of its value at the end of the term, taking into account the mileage you’ve done. If the car costs £27,995, and you estimate that you’ll do 9,000 miles over the three year term, depreciation could be £19,450, making the car worth £7,545 at the end of the term. Your monthly payment is calculated on the depreciation of £19,450, plus fees and interest.
|Who owns the car?
||Who owns the car?
|The finance company owns the vehicle during the repayment period. Once you've made the final payment, it's legally yours.
||The finance company owns the vehicle during the repayment period. Once you've made the final payment, it's legally yours.
|How do I apply for a HP loan?
||How do I apply for a PCP loan?
|Complete a hire purchase car loan application online in minutes. We help to arrange deals for good and bad credit drivers as well as self-employed drivers who may have struggled to get finance in the past. We always aim to find the best deal for our customers, and you’ll have a credit decision within two hours.
||Apply for a personal contract purchase finance, fill in the online car loan application and we’ll take it from there. You can have an instant decision on your vehicle finance and once it has been approved and underwritten by one of our lenders, you’re free to choose your vehicle from any dealer nationwide.
Which kind of car loan should I choose?
The best deal depends on your financial situation and the vehicle you are buying. A PCP is a shorter term deal, with generally proportionally lower monthly payments compared to HP as a large chunk is deferred from payment until the end of the agreement. If you don’t have access to a large deposit, this may also be a better option for you. If you prefer to change your car regularly, PCP may be best as it promises lower monthly payments and means you don’t need to shell out on what can be expensive repairs and maintenance on an ageing car for resell.
If you haven’t exceeded the maximum mileage agreed when you took your PCP contract on, you have the option of returning the vehicle to the finance company if you feel it’s not worth the final lump sum payment you are still due to pay in order to become the true owner. However, if the idea of a lump sum payment looming at the end of the agreement is off putting, HP may prove to be best. An HP agreement is generally simpler with only a fixed monthly payment due until the contract is up. However, usually interest payments are higher due to the benefit of taking longer to pay off the vehicle loan to keep the monthly payments down. The interest on a HP loan is the same throughout, whereas the interest you pay on the monthly instalments for a PCP is different to the interest paid on the residual amount, making things a little more complex with a PCP.
Here at Carfinanceplus.com we’re experts in car finance deals for new or used cars. Check your free eligibility and see how much you can borrow for a 0% deposit car loan deal.