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PCP vs Hire Purchase: Which Car Finance is Best?

There are so many reasons why more drivers than ever are choosing to use car finance as a way to get a car. From the ability to spread the cost to get a newer car than you would with cash alone, the popularity of car loans is on the rise. However, many drivers aren’t sure which type of car finance agreement is best for them. 

The two most popular car finance agreements in the UK are Personal Contract Purchase (PCP) and Hire Purchase (HP). Both of these allow you to pay for a car over a term that suits you and can fit in with your monthly budget. If you’re unsure whether to go for a hire purchase or a PCP car finance agreement, the guide below is here to help you look at each in more detail and decide which is best for your circumstances. 

Hire Purchase (HP).

Hire purchase is one of the most straightforward forms of car finance. Through hire purchase, you borrow an amount that values your chosen car, and the loan is secured against the vehicle. Your loan is then split into equal monthly payments and includes interest and any other fees that you agree to pay over a fixed term. Hire purchase deals can be spread over 3-5 years and tailored to your budget. The lender owns the car throughout the agreement until the final option to purchase fee is made, and then the car is yours to keep! 

Hire purchase car finance deals can be suitable for those with bad credit as it’s a secure loan, and lenders can set their interest rates accordingly. It can mean higher interest rates for those with bad credit, but it could be easier to get approved for than other forms of finance. It’s worth noting, though, that the lender does own the car throughout the agreement, and if you fail to stick to the rules of the agreement, the lender has the right to use the car as collateral. 

Why should I choose to hire a purchase?

If you’re considering getting a car on HP, it could suit you based on a few factors. 

  • If you wish to keep the car at the end of the deal and don’t mind keeping a car over a number of years.
  • If you don’t want to be restricted by mileage limits or damage charges at the end of the deal. 
  • If you don’t have the money to pay for a large balloon payment at the end of the deal to keep the car. 
  • If bad credit means you would be otherwise declined for another form of finance. 

Personal Contract Purchase (PCP).

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Personal Contract Purchase is a form of hire purchase but has a different structure entirely. Instead of splitting the cost of your chosen car, your monthly payments will cover the depreciation cost with interest on top. Drivers like the flexibility of PCP car finance deals because, at the end of the deal, you have more options. Once every payment throughout the term has been made, you can choose what to do with the car. 

  1. Hand the car back to the dealer.
  2. Use any positive equity in your deal towards a new car on a new PCP deal. 
  3. Pay the final, large balloon payment to take ownership of the car. 

Before entering into a PCP agreement, you will need to set an agreed annual mileage and also agree to keep the car in good condition. If you exceed the mileage or hand the car back to the dealer in a state beyond general wear and tear, there will be additional charges to pay. 

Why should I get a car on PCP?

PCP is a flexible form of finance and can be suited to many people based on the factors below. 

  • If you like the flexibility of trading in your car every couple of years.
  • You would like smaller monthly payments and a lower initial deposit.
  • You aren’t bothered about owning the car at the end of the deal.
  • You would like a brand-new car but with affordable payments. 

Both PCP and HP are great ways to pay for your next car, but it’s always worth remembering that getting a car on finance will never be guaranteed. You will need to meet the lender’s criteria first before getting approval, and a few factors can decrease your chances of getting a loan. Things like bad credit history, no previous credit, low monthly income, or employment status can affect the likelihood of approval. If you’re struggling to get approved due to bad credit, it can be a good idea to take some time to improve your credit first and reduce any current debt before taking on another loan. Not only can it get you better acceptance rates, but it also could improve your interest rate offered and help save you money. 

Featured Photo by Antoni Shkraba: