What is the difference between PCP and HP?
If you’re looking to purchase a new or used car, you may have considered taking out finance to make the payments more affordable. However, you might not have decided between personal contract purchase (PCP) or hire purchase (HP).
In this article, we’ve explained the difference between PCP and HP, including how finance is structured for each, and offered advice around which type of loan might suit your circumstances.
What is PCP and HP?
PCP finance and HP finance are both common types of finance that allow you to purchase a new or used car by making monthly payments over an agreed period rather than one lump sum up-front. Zuto works with a large number of lenders to make sure you get a HP or PCP deal that suits both your financial and personal circumstances. We even work with lenders who specialise in bad credit car finance.
PCP vs HP: what are the differences?
While PCP and HP might both be types of car finance, there are some key differences to be aware of. We’ve outlined the most common contrasts, to give you a better understanding of how each finance agreement works.
Owning the car outright with HP vs PCP
When you purchase a new or used car on finance, one of the first things you should consider is whether you wish to own the vehicle outright at the end of the agreement:
- Hire purchase: when you take out HP finance, you agree to repay the total value of the car, plus interest, over a fixed term. This means, once your finance period has ended, you have covered the complete cost of your vehicle and it’s yours to keep.
- Personal contract purchase: when you take out PCP finance, you agree to pay the depreciation of the car, plus interest over a fixed term. This means, once your finance period has ended, you can either choose to return the car or pay a final ‘balloon payment’ to cover the remaining value.
PCP vs HP: How do repayments work?
Generally, you’ll pay an initial deposit at the beginning of your HP or PCP agreement before committing to fixed monthly payments (however, here at Zuto we also offer no-deposit finance). Your monthly repayments will be centred around:
The cost of the car: hire purchase repayments cover the complete cost of the car over an agreed period of time, meaning the monthly amount payable will be a portion of the vehicle’s value (plus interest). On the other hand, PCP repayments only cover the depreciated value of the car, potentially making monthly repayments over the same period lower.
Length of your contract: because hire purchase finance covers the full cost of a car, contracts are often offered over a longer period than equivalent PCP arrangements, to make repayments more affordable. Generally, HP repayments are made over 12-60 months, while PCP repayments are made over 24-48 months, however the term of the agreement is dependent on your own individual requirements and circumstances.
Ending a PCP or HP finance agreement early
When taking out either type of car finance, it’s important to know whether you’re able to end your agreement early. This could be for a range of reasons, from changes in personal circumstances, to your job no longer requiring you to have a car.
Fortunately, both types of agreement allow you to settle your finance early – some lenders may require you to have paid at least 50% of the loan amount. You’ll need to get in touch with your lender directly, and they’ll be able to offer you a settlement figure or advise of any next steps.
Two factors to consider include:
- If you are coming towards the end of your HP finance agreement, it may be worthwhile to settle the remaining value rather than end the agreement early. This way, the car is yours outright and you can either sell it or trade it in for a new vehicle.
- If your vehicle is currently worth more than you owe in repayments, it might be worth trading it in (rather than terminating the contract) and putting the positive equity towards a new car deposit.
HP vs PCP: which is right for me?
Now you know the core differences between personal contract purchase vs hire purchase, including how each finance plan is structured and whether you own the car outright at the end of the agreement term, it’s time to consider which is best-suited to your circumstances:
|Finance features:||Hire purchase (HP)||Personal contract purchase (PCP)||Personal loan|
|Requires initial deposit||Optional||Optional|
|Car is yours at the end of the agreement||Optional|
|Fixed monthly payments|
|Avoid (final) balloon payment|
|Avoid excess mileage charge|
|Secured against an asset (e.g. a car)|
|Support with vehicle issues|
What are the next steps?
Whether you’re considering PCP or HP, see how much you can borrow by inputting your details into our quick and simple finance calculator, which takes your monthly budget, repayment period, and credit score into account.
Mike has worked at Zuto since 2018 and uses his experience within the industry to help customers understand the ins and outs of car finance.