HP vs PCP Finance Pros and Cons: Expert Guide

Car Budgeting: Is Car Finance A Good Idea?

If you're considering buying a car, one of the first considerations is your budget and how you'll pay for it. Should you buy a car with cash or take out car finance? And how can you actually budget for a big car purchase?

Today, we're looking at two main types of car finance: hire purchase and PCP.

We'll cover the PCP finance pros and cons, benefits and drawbacks of hire purchase, and how to make the decision.

What is PCP (Personal Contract Purchase) car finance?

PCP finances plots the car's value into monthly payments. At the end, you can keep, trade, or return it.

The monthly payments and deposit amount don’t pay off the car, though. Instead, they cover the predicted depreciation over the contract length.

PCP can be settled with a lump sum (balloon payment) to own the car outright. Alternatively, if you’re not interested in keeping or upgrading the vehicle, you can simply return it and walk away at the end of the term.

Typically, PCP finance lasts for three to four years. But this may vary depending on your personal contract.

PCP Pros And Cons

Is getting a car on finance a good idea for you? Here are some of the pros and cons of PCP finance:

Pros of PCP	Cons of PCP
Lower Monthly Payments — PCP finance usually has lower monthly payments than traditional options like Hire Purchase (HP) or Personal Loans, as payments cover only a portion of the car's value.	Depreciation — You don't own the car until the final balloon payment, meaning you build no equity and could owe more than its depreciated value.
Flexibility — At the end of the agreement, you can buy, return, or exchange the car, offering flexibility.	Mileage Restrictions & Fees — If you exceed the agreed mileage, you will be charged an excess fee.
Fixed Interest Rates — You know your exact monthly payment.	Deposit Needed — PCP finance often requires a large upfront deposit, which can be a barrier for those without a lump sum.
New & High-End Cars — PCP finance lets you drive a new car every few years without maintenance costs.	Balloon Payment — At the end of the agreement, a balloon payment is required to keep the car, which can be a financial burden if unprepared.
Smaller Deposit — PCP only covers a portion of the car’s value; there's a smaller deposit sum.	High-Value Cars — PCP is usually used for more expensive cars (over £10,000). This may limit your choices.
No Selling Stress — Once the contract ends, you simply return the car to the dealer.	High Maintenance Standards — To avoid wear and tear charges, you keep the car in excellent condition.

PCP - Is it for you?

PCP finance is a good option if you want to drive a new car every few years and can afford the monthly payments and deposit.

It's important to understand the risks and terms before signing the agreement.

What is Hire Purchase?

Hire purchase is the most straightforward way to finance a car.

It requires you to make an initial deposit to become the ‘registered keeper’ of the car. Once complete, you make monthly payments towards the value of the vehicle. When these are finished, the finance company gives you outright ownership of the car.

Hire purchase contracts typically range from two to five years. Is Hire Purchase a good idea? Keep reading to find out.

Pros and cons of Hire Purchase

Here are some of the pros and cons of Hire Purchase finance.

Pros of Hire Purchase	Cons of Hire Purchase
Ownership — Unlike PCP, Hire Purchase lets you own the car after the final payment, with no balloon payments.	Higher Upfront Costs — Hire Purchase usually requires a higher upfront deposit which can be a barrier for entry.
No Mileage Restrictions — Hire Purchase has no mileage limits, so you can drive as much as you want without extra fees.	Depreciation — Like any car, it will depreciate, and if sold before the agreement ends, you may not recover the full amount paid.
Lower Interest Rates — Interest rates for Hire Purchase finance tend to be lower, making it a more affordable option.	Longer Repayment Times — Hire Purchase has longer repayment periods than PCP, potentially leading to higher interest costs.
Good For Poor Credit — Can be a good option for those with poor credit, as it offers fixed interest rates and longer repayment periods.	No Flexibility — Unlike PCP, Hire Purchase offers no flexibility to return or exchange the car before the agreement ends.
Less Car Maintenance — Hire Purchase agreements have wear and tear fees, but as the owner at the end, you're free to maintain the car as you wish.	Restricted Dealership Availability — While you can access old and new cars, the dealership availability is smaller.
Flexible Payments – No Hire Purchase contract is the same. You can work with your dealer to find a monthly payment that suits you.	Car At Risk if Payments Missed — You must be on time with payments.
New & Used Cars — This financing option gives you more choices for both new and used vehicles.	No Selling/Modifying Car — You can’t make changes to the car or sell it before you own it outright.
	Harder to Change — There’s more fuss if you want to change cars at the end of the term because you’ll have to sell it yourself.
	Higher Interest — While it’s great to spread the costs and access lower payments, this can result in higher interest payments.

Hire Purchase - Is it for you?

A Hire Purchase can be a good option if you want to own the car outright and can afford the higher upfront costs and monthly payments.

Be aware of risks like depreciation and fully understand the terms before signing.

Key differences between PCP and hire purchase

Before you make your decision, take a look at the main differences between PCP and hire purchases.

PCP provides more options at the end of the contract.
PCP has lower monthly payments as it only covers depreciation.
PCP sometimes has mileage restrictions and wear and tear costs. Hire purchase doesn’t.
Hire purchase leads to ownership at the end of the contract. PCP requires a balloon payment to own the car.

Is PCP or hire purchase cheaper?

PCP might seem cheaper at first thanks to its lower monthly payments, but it accumulates more interest than a hire purchase. Also, you may need to make a final balloon payment or cover wear and tear fees.

Hire purchase has higher monthly payments, but you own the car at the end and don’t encounter as many extra costs.

PCP vs hire purchase – which is best for you?

PCP offers flexible end-of-contract options and lower monthly payments, making it ideal if you don't want to own the car.

With Hire Purchase, you pay a deposit and divide the remaining cost into higher monthly payments over up to five years. While you pay less interest, you own the car outright after the final payment, which is not as large as a PCP balloon payment.

Cost differences between Hire Purchase and PCP

The best way to see the cost difference between Hire Purchase and PCP is with a hypothetical situation. For example, let’s look at a £40,000 car with a 0% interest deal (possibly with PCP but not always with Hire Purchase).

With a £10,000 deposit, and when the contract ends, the optional GMFV (Guaranteed Minimum Future Value) payment the PCP deal includes is £10,000.

This means you’ll have to pay off £30,000 in the Hire Purchase deal but only £20,000 in the PCP deal. For PCP, this is £555.55 a month or £833.33 with Hire Purchase.

But remember, at the end of the Hire Purchase deal, you own the car — but in the PCP, you won’t unless you pay the GMFV payment.

Can you end your car finance early?

Yes and no. To leave your car finance deal early, you have to have paid over 50% of the loan agreement off (including fees and interest).

Ending your contract early is rarely advantageous unless you desperately need to.

Alternative car finance options

You can also use a personal bank loan to finance a car.

Your ability to use a personal loan for a car depends on your credit limit, score, and the vehicle's cost. Consider fees and interest, as even 0% offers have expiration dates.

Is Car Finance A Good Idea?

Car finance has pros and cons, and it will come down to your personal situation.

Advantages of Car Finance	Disadvantages of Car Finance
Spreading the cost — over several years	You pay interest — on the loan
You may afford a better car — than with a single cash payment	There may be a cap — on mileage
Regular payments — like in a car finance deal, show financial responsibility and boost your credit score.	You’ll need to carefully calculate — your monthly disposable income
PCP gives you access — to a new car every few years

Buying a car on finance – what are the basic steps?

Ready to move forward? Here are the basic steps you can take to buy a car on finance.

Decide on the style of car you need, and make a shortlist of potential options
Work out an affordable budget for monthly car repayments if you choose car finance like hire purchase or PCP
Search online or locally for the car(s) on your shortlist
Speak to car dealers about finance options
Make your finance application

The bottom line

Buying a car on finance spreads the financial load and keeps your savings intact, but you must find the right deal for your finances. Take time to explore the PCP and Hire Purchase pros and cons before making the big decision.

How Bumper can help

Car replacement costs can be higher than expected and poorly timed, and that’s where Bumper comes in.

Split the cost of expensive car repairs into interest-free monthly repayments and find a reliable repairer in your area.