PCP Vs. HP – How To Get The Best Deal On Car Finance?

by Emma Anderson Short Term Loan Solutions with Loan

Owning a car is exciting, but the hard part is the budget. With the car’s prices increasing enormously, it is becoming difficult for middle-class families to own a good-condition car in the UK. That’s where car financing is making scope for all. You can now buy all types of the car using this excellent provision, no matter whether brand new or second-hand.

Chose a car that suits your lifestyle – a luxury car, a hatchback, a 4x4 or the sports car that you have always dreamt of! Check on the budget and proceed with the financing options.

There are two most common and significant types of car financing – Hire Purchase (HP) and Personal Contract Purchase (PCP). Let’s find here which will be the right one for you.

Hire Purchase – The Term Explained

Hire Purchase is type of car financing that promotes paying for a car in regular monthly instalments. Instead of buying the car with complete down payment, here you have to make a minimal down payment and the rest of the car’s value will be covered under the loan.

The equated monthly instalment will include a specific interest rate. In most cases, the down payment will be around 10% of the car’s cost. Normally, the tenure for HP contracts range between three to four years, i.e. you have to pay 36 to 48 instalments against the total cost of your vehicle. Once you pay off the amount in full, you can finally own the car in your name.

Overview Of Tenure And Interest Rate For HP

The amount you pay each month depends on the length of your contract and the size of your deposit. Any contract or purchase fees and the rate of interest also leverage the monthly repayments.

As per rules, monthly instalments are lower when deposits are larger, and contracts are longer. However, more number of months means you’ll be paying more interests over time in this case, which ends up paying more appears at the end.

The amount of interest charged is known by the term Annual Percentage Rate (APR). It encompasses the interest rate and another additional fee like an arrangement charge. Normally, buyers use the APR to compare loan offers from different lenders.

Sometimes a lender can offer a deal where you have to pay 0% APR. But it happens at the discretion of the creditor, so you must read the small print before signing the contract.

Personal Contract Purchase – How It Works?

Personal Contract Purchase (PCP) is another car financing option just like HP, but minor differences make the two-car financing options distinct in their own ways.

If you take out car finance with an instant decision and have almost no savings in the account, then PCP is relatively a better financing option for you. As here, you don’t have to repay the entire cost of the car in a monthly instalment. Let’s explain this clearly followed by an example –

In PCP, financial lenders tend to predict a certain amount that the car is supposed to lose in value over a certain period. This predicted amount is known as Minimum Guaranteed Future Value (MGFV). So the amount that you have to repay here will be that lost-in-value amount minus your deposit amount.

For example, suppose your car is worth £30,000. While buying, you have made a down payment of £3000 i.e. 10% of your vehicle cost, and the lender has projected that the car’s value will be £20,000 in three years. Therefore, the amount that you have to repay over the tenure of three years is £7000.

Therefore, the biggest difference between PCP and HP is that a large part of your debt remains unpaid till the end of the loan. It means the monthly instalments in PCP are much lower than Hire Purchase, but you have to make a ‘balloon payment’ at the end of the term, unlike HP, to own the car completely. Another difference is that you can return the car in PCP, which is not allowed in HP.

However, both HP and PCP require a down payment towards the cost of the vehicle, and that amount is deducted from your overall repayment.