When buying a vehicle on finance there are two main types of lease to consider. Here we explain the key features of both so you can decide which would be right for your needs. So, what's the difference between Hire Purchase (HP) and Personal Contract Purchase (PCP)?

Hire Purchase (HP)

HP is possibly the most popular method for funding new and used cars today, for both business and personal use. A HP agreement allows you to spread the cost of the vehicle over an agreed term and the agreement is secured against the vehicle until the payments, as well as interest, have been made in full.

If you choose a HP, the total amount you borrow will be divided into equal monthly payments over 36 to 48 payments. At the end you’ll have paid off the amount you borrowed in full and will own the vehicle.

The amount you will pay each month will depend on the size of the deposit and the length of your contract, as well as any interest charged and contract fees. The more money you can put down as a deposit and the longer the contract the lower the monthly payments will be, although a longer contract will incur more interest. Larger deposits and longer contracts tend to result in lower monthly payments, but you’ll pay more interest over time, so could end up paying more for the car in the end.

Key advantages:

• Flexible repayment terms (from one to five years) to help fit in with your monthly budget.
• Low deposit options available (typically 10% of the purchase price).
• Fixed interest rates.
• No significant end of contract charges.
• You own the vehicle at the end of the contract.

Things you need to consider:

• You must have fully comprehensive vehicle insurance throughout the term of the agreement.
• ‍‍You will need to decide at the end of the contract as to what you wish to do with the vehicle - you could sell it, return it, or keep it.
• Monthly rentals are generally more expensive than PCP.
• You will not own the vehicle until all the payments have been made, including the final balloon payment, so if you cannot keep up with the repayments, the vehicle may be repossessed.

Personal Contract Purchase (PCP)

PCP is a vehicle finance agreement which can be used to fund a new or used vehicle for personal use. PCP is similar to Hire Purchase i.e., you pay a deposit upfront and make monthly payments thereafter for between 24-48 months (typically).

Unlike HP, however, you don’t pay off the full value of the car in instalments, but the amount the finance lender predicts the car will lose in value over the length of the contract, minus your deposit.

A major difference between PCP and HP is that PCPs are offered with an optional final balloon payment, sometimes called a Guaranteed Minimum Future Value (GMFV), which allows you to take ownership of the vehicle at the end of the contract. This is a large percentage of the debt is left to the end of the loan which enables you to pay smaller amounts each month (when compared to HP) but at the end of the contract, you will need to pay the remaining amount in a ‘balloon payment’ before you own the car.

However, unlike HP, you also have the option to return the car at the end of the contract, and if your car is worth more than the MFGV (for example you’ve kept it in great condition and it has low mileage) then you can use the difference between your final payment and its market value as a deposit on another PCP lease.

Key advantages:

• Fixed monthly costs
• Low initial payment (including a no deposit option)
• Avoid depreciation
• Optional maintenance packages
• Potential return
• Avoid risk
• Flexible upgrade options

Things you need to consider:

• Longer contract lengths will increase the amount of interest you pay.
• If you’ve opted for a BHP and the vehicle is worth less that the balloon when the contract ends, then you may be liable for shortfall.
• The contract doesn’t include road-tax.
• Full maintenance options aren’t available, although you may be offered a manufacturer service package.
• You will not own the vehicle until all the payments have been made, so if you cannot keep up with the repayments, the vehicle may be repossessed.

Other fees to consider when leasing a vehicle

Whether you choose a HP or a PCP contract you will need to pay a deposit upfront towards the cost of the car which is then deducted from your overall repayment.
In some cases you may also have to pay another deposit to secure the car in dealer stock but in some cases this will also be refunded once the contract is finalised. Finally, some deals will involve contract and arrangements fees, so it is worth asking about these when you are budgeting.  

In summary

Cost and fees

Hire Purchase repayments tend to be higher than PCP, but they are fixed so you will know what you are paying and for how long. As PCP contracts are based on the future value of the vehicle this can be impacted by several factors including age, mileage, and wear and tear. The monthly PCP payments are usually cheaper than HP, but in order to own the vehicle at the end you will need to pay the chunky balloon payment at the end.

In most cases both PCP and HP deals charge interest, but some 0% interest offers are available.

Mileage allowance

With a Hire Purchase contract you usually won't have a mileage limits as the end result (assuming you make all your payments) is that you will own the vehicle, but a PCP is more like borrowing the car, so you have to agree a mileage allowance with the lender. The more miles the vehicle has done at the end of the PCP, the less it will be worth and if you exceed your pre-agreed mileage limit there may be fees to pay.

Maintenance

Hire Purchase contracts usually won't include fines for wear and tear as you will own the car at the end of the finance term, but with PCP you are technically only borrowing the vehicle until you have made the final balloon payment. To maximise the future value of the car PCP contracts often require a full manufacturer service history and you may have to cover the cost of damage outside of wear and tear.

Ownership

With both a Hire Purchase agreement and a PCP, you will not own the car until all payments have been made.

This is more straightforward with a HP as it is simply a case of making all the fixed monthly payments, but with a PCP you would have to make the final balloon payment which is often substantial, return it, or trade it in against another car.

For more information or to request a leasing quote for a vehicle, contact us today.

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