What Is Hire Purchase?
Hire Purchase (HP) is a method of finance when buying a car. Typically, if you’re using Hire Purchase for either a new or used car you would need to pay an upfront deposit, and then pay off the value of the car in monthly instalments. This means you would not own the car until the full payment is made. Most of the time, you’ll be required to put down a deposit of around 10% of the vehicle’s value. Then, the rest of the car price will be paid off in instalments that can last for anything from less than 1 to over 5 years.
Hire Purchase can be arranged by car dealerships or brokers and the rates will vary depending on your credit score, along with the type of car you’re looking at. Rates tend to be competitive for new cars, but not so much for those that are second hand.
Once you’ve paid off all instalments of the Hire Purchase loan, you’ll typically be asked to pay an ‘Option To Purchase’ fee, once this – along with the rest of the payments – have been made, you’ll legally own the car.
What Is PCP Finance?
Personal Contract Purchase (PCP finance) is another loan-type method of acquiring a car. Unlike a normal loan, (and unlike Hire Purchase) you’ll typically never pay off the full value and won’t ever own the car.
Similarly to Hire Purchase, you’ll be required to pay a deposit of around 10% when you opt to ‘loan’ a car through PCP. You’ll then pay instalments of a loan which is assessed on how much the car is likely to be valued over the term of the deal, which can be anything from 24 months to 36 months. The payments you make will chip away at this loan and will carry added interest.
Most of those who use PCP opt to upgrade to another model of car once their lease is up, but if you’re wanting to keep the car you’ll usually be able to purchase it under what’s called a Guaranteed Minimum Future Value (GMFV) – which is basically how much the dealer expects the car to be worth once your finance lease has ended. Alternatively, providing there’s no damage, you can hand the car back and walk away at the end of your contract – or open a new PCP agreement for a different car with your dealer.
Hire Purchase Advantages And Disadvantages
As with any methods of finance, Hire Purchase agreements have their pros and their cons. The advantages and disadvantages of this method of leasing and buying a car are below.
- You’ll typically own the vehicle (given you pay the Option To Purchase fee) once you’ve paid off the agreement.
- Hire Purchase gives you the option to spread the cost of a car over a time period, which is good if you cannot afford a high lump sum.
- The interest rates are typically fixed for the entire length of the agreement.
- You’re usually tied in to Hire Purchase, which means if you find yourself in a position that means you cannot keep up with payments – you may find yourself losing the asset and damaging your credit rating.
- Because of interest, it’s likely you’ll end up paying more than it would cost to buy the vehicle upfront.
- If your Hire Purchase car is damaged or stolen before it’s fully paid for, your insurance may not cover it.
PCP Advantages And Disadvantages
So what about the advantages and disadvantages of PCP? You can find them below.
- PCP is a great option if you don’t want to commit to one car model, as it gives you the option to change.
- There is less financial risk with a PCP lease as you’re never paying the full cost of the car.
- Unlike a car loan, PCP only requires you to pay a relatively small deposit (10% compared to 40% to 60%)
- Unless you pay for the rest of the car at the end of the PCP agreement, it will never truly be yours.
- You have to keep the car in great shape and you can be liable for any issues, even really small ones, when it comes to return the car.
- You are entitled to stay within the annual mileage chosen upfront and you’ll be charged for any miles that you go over.
So What’s The Difference Between Hire Purchase And PCP?
The main difference between Hire Purchase and PCP is that with Hire Purchase, you finance the total cost of the car (minus deposit or part-exchange allowance). With PCP, you finance the depreciation. PCP and Hire Purchase work in the same way on paper, but what is financed through the scheme varies.
With PCP, you can either pay off the remaining value (a balloon payment), hand the car back or enter a new PCP agreement once your lease has ended. With Hire Purchase, at the end of your agreement – you’d have paid off the full value of the car and will own it (after a one-off ‘Option To Purchase’ fee is paid).
At first glance, PCP certainly seems like the cheaper option – as your instalment payments will be much less than Hire Purchase. However, in the long run, Hire Purchase works out cheaper as you’re paying for the whole asset – and won’t have a big lump sum outstanding at the end of the agreement should you wish to keep the vehicle.