buying

PCP or HP: which car finance option makes most sense?

Spreading the cost of buying a car holds huge appeal for most motorists. We take a look at the pros and cons of the two most popular finance options

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Three letters have come to dominate the car finance market in recent years: PCP. It stands for personal contract purchase, and itโ€™s by far the most popular way to finance a new car. According to the Finance and Leasing Association (FLA), some 76% of all new car finance agreements in the year to March 2016 were PCPs.

Itโ€™s far from the only type of car loan, though. Good old-fashioned hire purchase, or HP, is still alive and kicking and still holds appeal for some car buyers.

So, how do you choose whether a PCP or HP agreement is the right way to finance your next new car?

What is a PCP?

Letโ€™s start with the basics. A personal contract purchase is technically a form of hire purchase, but a substantial portion of the amount borrowed is left at the end of the loan.

So whereas conventional hire purchase divides the total amount borrowed into equal monthly payments, typically over three or four years, personal contract purchase involves a series of smaller monthly payments, with a larger payment at the end of the agreement. This end payment is sometimes referred to as a balloon payment, or the minimum guaranteed future value (MGFV).

On the face of it, leaving a big lump sum until the end of the agreement seems like putting off the painful moment when you have to find several thousand pounds. But the point is you donโ€™t have to; paying the MGFV is one of three options open to PCP customers at the end of the loan.

If you donโ€™t want to pay, just hand the car back and call it quits. Or, if the car is worth more than the MGFV (which is usually the case), you can use the difference between the final payment and its true market value as a deposit for another new car.

Why should I choose PCP?

PCPโ€™s most obvious attraction is the size of the monthly payment. "Under a PCP you are financing a carโ€™s depreciation rather than the whole price, so that reduces the monthly cost," says the FLAโ€™s head of motor finance, Adrian Dally.

Itโ€™s not just that itโ€™s cheaper, though. โ€œPCP goes with the grain of changes in modern society. A few years ago we owned our mobile phones. Now most people pay a monthly rental. With cars the mental switch from needing to own something to paying for it in monthly instalments may be a few years behind, but itโ€™s fundamentally the same thing,โ€ Dally says.

Flexibility is another key advantage of PCPs, both compared with HP and forms of leasing, such as personal contract hire. โ€œA PCP keeps consumersโ€™ options open. When people buy the car, they donโ€™t necessarily know if they will make the balloon payment to own the car outright, trade in the car for a new one, or just hand the keys back with nothing else to pay, but they know they will have those three choices,โ€ Dally concludes.

Should I still consider HP?

As the take up of PCPs has increased, so the popularity of HP has waned. From 19% of the new car finance market in the year to March 2015, its share has dropped to just 15% in the year to March 2016.

Itโ€™s not entirely dead and buried, though. HP can work out cheaper than a PCP over the lifetime of a loan because with HP youโ€™re paying off the amount borrowed more quickly. With a PCP, if you decide to buy at the end of the agreement, you have to settle the big balloon payment.

HP isnโ€™t saddled with one of the drawbacks of a PCP: mileage limits. A PCP agreement is drawn up on the assumption you will cover a certain number of miles each year and no more. Thatโ€™s important because the number of miles you are likely to have covered by the end of the agreement is used to calculate the MGFV.

The farther you drive, the less the car will be worth, so itโ€™s important that the finance company has some sense of how far you drive each year in order to set the MGFV fairly and accurately.

With HP, the finance company doesnโ€™t give two hoots how far you drive. Thatโ€™s because thereโ€™s no MGFV to be calculated, so the speed at which the car loses value makes no difference to the terms of the loan. You finance the cost of the car, less whatever deposit you have put down. Itโ€™s that simple.

Go over the mileage limits set out in a PCP agreement and there will be penalty charges to pay. If youโ€™re only talking about a few miles you wonโ€™t be seriously out of pocket. However if, say, a new job means a much longer commute, then you could be hit hard.

If you do find you are covering a lot more miles than planned, donโ€™t wait to be clobbered with a big bill at the end of the agreement. Instead, talk to the loan provider about your change in circumstances so the terms of the agreement can be revised. โ€œRing up the finance company,โ€ advises Dally. โ€œTheyโ€™ll help work out the best solution. Like with all good contracts, [a finance deal] recognises that circumstances may change.โ€

How do I compare PCP and HP agreements?

It pays to look over any finance agreement in detail. The monthly payment may be the headline-grabbing figure, but itโ€™s not the only important number to check on any finance quotation.

Below we work through a couple of real examples. In each case these have been supplied by car manufacturer finance houses, using the same deposit and the length of agreement to ensure weโ€™re comparing like with like. Just keep in mind that while these deals were available at the time of writing, they may not be available now.

Ford Focus

Ford has supplied finance quotes for a Ford Focus 1.0 Ecoboost Titanium with metallic paint. One quote is for Fordโ€™s PCP product, called Options, the other is for Acquire, Fordโ€™s name for HP. Both have a ยฃ1500 deposit contribution from Ford and a customer deposit of ยฃ4000. Both deals last for three years and Ford offers the same 2.9% APR on both.

In terms of monthly payments, the PCP deal is streets ahead. Youโ€™ll pay just ยฃ228.08 for the Focus, a massive ยฃ180.62 less than the monthly bill on HP. Thatโ€™s based on 9000 miles per year. Go over that and youโ€™d be charged 7.2 pence per mile. Something to keep in mind, but even exceeding the mileage by 1000 miles will cost only ยฃ72.

However, if you want to finance the car over three years, but keep it once it has been paid for, the HP deal works out more affordable. With a total cost of ยฃ18,733.20, itโ€™s ยฃ315.68 cheaper than the PCP. Then again, if thereโ€™s any doubt in your mind whether you want to keep the car, the flexibility of a PCP probably outweighs that small saving.


Kia Sportage

We used Kiaโ€™s online finance calculator for our PCP and HP quotes (Kia calls HP Conditional Sale, but itโ€™s another name for the same thing). The Sportage 1.7 CRDi 2 manual costs ยฃ22,050, and in each case we put down a ยฃ2500 deposit. Kia bumps that up by ยฃ500 to sweeten the PCP deal, but there is no contribution for the HP. Thereโ€™s an interest rate of 4.9% APR for both.

No surprises with the monthly payments โ€“ the monthly PCP bill is ยฃ276.82, less than half the cost of HP. However, the 14.9p per mile excess mileage charge will hit PCP customers who exceed the 10,000-mile annual limit. Then thereโ€™s the big ยฃ11,340 final payment if you want to own the car. In this case, that makes PCP ยฃ777.20 more expensive in total, so HP is the way to go if you want to own the car outright at the end of the term.

In general, if you want flexibility, or you know you want to part-exchange the car after three years, weโ€™d go with PCP, but if you want to buy the car and keep it for longer weโ€™d choose HP.

Itโ€™s also worth remembering that if you take the third PCP option and simply hand the car back to avoid the final payment, youโ€™ll have nothing to show for three years of monthly payments, which is seen by some buyers as by far the least appealing route to take.

What Car? says...

Choose PCP ifโ€ฆ

  • Low monthly payments are all-important
  • Youโ€™re not sure what you will do at the end of the agreement
  • Thereโ€™s a big manufacturer deposit contribution and a lower interest rate than for HP

Choose HP ifโ€ฆ

  • Youโ€™re sure you want to keep the car beyond the end of the finance term
  • High monthly payments donโ€™t put you off
  • Youโ€™ve compared PCP and HP deals and HP offers a lower total cost

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