When looking to buy a new vehicle, it may feel like the world of car finance is a labyrinth of acronyms and confusing terminology, especially when it comes down to the different types of car financing.

In this guide, we’ll cover the two most common options for car financing, Hire Purchase (HP) and Personal Contract Purchase (PCP). We’ll help you understand the differences between them and know which factors to consider to help you get on the road in your new car.

What Does HP Mean in Car Finance?

HP stands for Hire Purchase, which is a type of finance that allows you to borrow money from a lender or specialist broker to buy a car and repay it with interest over a set period.

Pros of Hire Purchase Finance

  • Stability: Because you’re ultimately paying off the price of the car, your monthly payments will typically be at a fixed rate throughout your term with no balloon payment at the end.
  • Ownership: If you’re looking to own a vehicle after your finance agreement, then a HP plan may be most suitable for you as you will own the car after you make your final payment.
  • Flexibility: Once you make the final payment, you’re free to do what you like to the vehicle. Meaning you can customise or modify the car to your liking. You could even sell it once it’s yours – the world is your oyster with a HP agreement.
  • No mileage restrictions: Sometimes a PCP agreement may come with a mileage restriction but this is not the case with HP.

Understanding Hire Purchase

HP car financing is relatively straightforward; the total amount you borrow from your chosen provider will equal the car’s purchase price minus any deposit or part exchange value. The interest rate charged by the lender will determine the total cost of borrowing over the loan term. This results in a fixed monthly payment that typically remains consistent throughout the agreement.

PCP Finance Meaning

PCP car financing offers an alternative approach compared to HP, focusing on lower monthly payments with an option to become the owner of the car with a balloon payment at the end of the term.

Pros of Personal Contract Purchase

  • Lower monthly payments: Compared to HP, PCP typically offers lower monthly costs, making it an attractive option for those who want to keep monthly costs down.
  • Post-term flexibility: When you get to the end of the PCP agreement, you may have the option to do one of the following:
    • Pay a final balloon payment and own the car.
    • Return the car to the lender with no further obligation. For those who like to upgrade to a new car every few years, this may be an attractive option.
    • Use any positive difference between the car’s value and the balloon payment as a down payment on a new agreement.
  • Potentially newer cars: due to the potentially lower monthly payments, PCP may be attractive for financing newer cars that may be typically out of reach with HP.

Understanding Personal Contract Purchase

PCP calculations are slightly more complex than HP. Like HP, you will need to consider the car’s purchase price, any deposit you may make and the loan term. PCP also factors in the Guaranteed Minimum Future Value (GMFV) of the car at the end of the agreement which is known as the balloon payment.

This estimated value is used to determine the balloon payment amount. The GMFV is set by the lender and is based on historical data and depreciation projections for the specific car model and mileage.

Based on this your lender will set a fixed monthly repayment over the agreed term to get to the balloon payment.

Factors to Consider Between HP and PCP

Choosing between HP and PCP will ultimately depend on your own individual circumstances and priorities. Here are some key factors to consider:

  • Budget: HP offers predictable costs with fixed monthly payments whilst PCP typically offers lower monthly payments but with a potentially large balloon payment at the end. Consider your long-term financial comfort and ability to handle a larger final payment.
  • Driving needs: be aware that some PCP agreements come with mileage limitations which could result in additional charges. If you need to make frequent journeys, HP might be a better option for you.
  • Ownership preferences: If you want to own the car outright at the end of your finance agreement and have the option to sell it, HP may be the option for you. If you would prefer lower monthly payments and the flexibility to upgrade to a new car every few years, PCP might be more suitable for you.
  • Read the fine print: Make sure you understand the terms and conditions of any car finance agreement before signing, making sure to pay close attention to interest rates, fees, mileage restrictions, and the Guaranteed Minimum Future Value.

HP and PCP Ease from Ucan

We hope this guide has helped you understand the differences between HP and PCP and you’re ready to start your application. Why not see what Ucan can offer you? Our application process is simple and only takes 30 seconds to get an initial quote.