What Car Finance is Better - HP or PCP?
07 Sep 2021
What Car Finance is Better - HP or PCP?
07 Sep 2021
What Car Finance is Better - HP or PCP?
You’ve found your dream car, or you’re at least wanting to start looking, but unless you have savings or someone generous enough to buy it for you, you will be wondering how you are going to pay for your car.
There are multiple options available for you to choose from. The most popular options include Hire purchase (HP), Personal contract purchase (PCP) and a personal Loan.
How do different types of car finance work?
Hire Purchase (HP)
With a Hire purchase deal, you will pay an upfront deposit and then continue to pay off the rest of the car in fixed monthly instalments including interest.
This type of loan is secured against your car, so you don’t actually own the car until it is paid off in full. The dealership that you have the agreement with owns your car until you have fully paid it off.
| Pros of Hire Purchase |
Cons of Hire Purchase
|
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No Mileage restrictions
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You can be repossessed If you fail to make payment |
| No Balloon payment at end of agreement | Missed payments can negatively affect your credit score |
| You own the car fully after you’ve completed all your monthly payments | You do not legally own your car until after your final payment |
| Your payments are fixed and so they remain the same throughout your agreement | |
| Can be expensive if you’re only looking for a short-term agreement | |
| Monthly payments tend to be smaller |
Personal Contract Purchase (PCP)
If you opt for a personal contract purchase, you will pay fixed monthly payments over a set period of time, with the option to pay a deposit at the start – making your monthly repayments smaller.
At the end of your agreement, you can give the car back to the dealership and if there is any equity, use that for a deposit towards a new car, pay what is called the “balloon payment” – (however much is left on the car), or take out a new PCP agreement.
| Pros of a PCP | Cons of a PCP |
| Low Interest | You have to pay a large final payment at the end of your agreement if you want to keep the car |
| You can get cars that you otherwise might not be able to afford | You have to stick to mileage restrictions, or you will face charges |
| You don’t have to consider the car depreciating by the end of your agreement | You have to stick to wear and tear restrictions or you will be charged |
| Smaller monthly payments |
Personal Loan
A personal loan is an unsecured loan that you get from a bank or lender. With a personal loan, you pay for the car in full upfront meaning that you have full ownership of the car from the start. You pay the loan back to the lender in monthly instalments rather than a dealership.
| Pros of a personal loan | Cons of a personal loan |
| The dealership cannot repossess your car if you fail to make your payments as you own the car | It’s harder to get accepted if you have a bad credit history |
| You can choose to buy a car from a dealership or a private seller | The best interest rates are reserved for people with good credit |
| You can use a portion of the loan to pay for all or some of the car and use the rest for something else e.g. insurance | You can’t usually get a personal loan for more than £25,000 |
| You can negotiate the price of the car | |
| You can sell your car before the end of your loan agreement as long as you continue your payments |
Hopefully this blog has outlined the options that are available to you and will help you in making the decision on what's right for you.
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This article was updated 18.10.2021
Editorial Disclaimer: This content is for entertainment purposes only. Opinions expressed here are the author’s alone, and not those of any bank, credit card issuer, or any other company. This article has not been reviewed, approved, or otherwise endorsed by any of these organisations. NB: The information on this page does not constitute financial advice, please do your own research to ensure that the product/service is right for your individual circumstances.