Different types of finance
* Your car questions answered * From finance to measuring mpg * Ask us here, too...
Can you tell me the difference between HP and PCP finance?
An HP (hire purchase) agreement is much the same as a mortgage. You put down a deposit and pay off the rest of the balance over a number of years (plus interest charges). Only when you've paid off the entire loan do you legally own the car.
With a PCP (personal contract purchase), the car's value at the end of the agreement is first predicted (this is known as the Minimum Guaranteed Future Value or MGFV). You borrow the difference between the car's price now and the MGFV, and repay the loan with an initial deposit followed by monthly payments.
At the end of the agreement you have three choices: first, you can give back the keys at walk away; second, you can pay the MGFV and own the car; third, if the car's actual value is higher than the MGFV (which is often the case), you can use this equity as a deposit on a new car.