Hire Purchase vs Personal Contract Purchase 2023

Disclaimer: The information below is not financial advice. The information below simply explains the function and benefits of each financing option. Before you decide, seek professional assistance either through a financial advisor or via our team of experts at Eden.

The path to car ownership isn’t as direct as we once thought, but that doesn’t mean it needs to be confusing. As car manufacturing and banking have become more automated, many have found convenience in what car financing has to offer: flexibly spreading the cost of a car through monthly instalments over a long period. Two of the most popular methods of financing, Hire Purchase (HP) and Personal Contract Purchase (PCP) might seem similar in theory, but they have distinct differences. Reach your verdict on the matter of Hire Purchase vs Personal Contract Purchase below so that you can start saving in the long run and enjoying your drive!

What is a Hire Purchase (HP)?​

Hire Purchase (HP) was previously the most popular form of car financing due to its simplicity. The total cost of the car is broken down into an upfront deposit and a series of monthly payments (typically with interest). On the final monthly payment, you will then have full ownership of the vehicle, at which point you can either decide to keep it or sell it. HP can be very appealing to some because the monthly payments you make are flexible, meaning you can choose to pay off the cost of a car from 12 months up to 60 months – just remember that longer terms typically cause higher interest payments.

While it may seem that HP financing is expensive, when looking toward the longer timeframes it’s easy to see that HP offers a low total cost out of your pocket. The option to sell the car at the end of your financing term has the additional benefit of contributing to another car or another HP financing term with a new car. What are some of the benefits of a Hire Purchase? Check out the list below.

  • If you enjoy the car you are driving on HP financing, you can keep it at the end of the agreement. This is particularly beneficial since ownership of a new car will last a very long time before you need regular maintenance or see a decrease in efficiency. You will see additional long-term savings here.
  • HP financing is purely based on the cost of the car – there aren’t any additional fees such as miles driven or wear and tear depreciation. This simplicity of no hidden fees is head-turning for many.
  • Fixed interest rates and flexible repayment terms mean you can tailor HP financing to your monthly expenses. In many cases, once half the cost of the car is paid off, you might be able to return it too.

What is a Personal Contract Purchase (PCP)?​

Over three-quarters of new car financing agreements are PCP, because our idea of car ownership is rapidly changing – many of the things we used to own are now being paid for monthly. PCP runs along the same lines as HP, with an initial deposit and payment instalments, but a big part of the money paid by you is at the end of the contract. This means you start with smaller monthly payments with a larger “balloon” payment at the end, sometimes called ‘minimum guaranteed future value’ (MGFV). Why? Because you are financing a car’s depreciation rather than its price. The idea of paying a balloon payment is daunting to some, but that is merely one of three options for you to choose from. Let’s go through them.

After paying a series of smaller monthly payments for the car you are driving, you have the option to own the car by paying the balloon payment at the end to cover the remaining cost. Your next option is to avoid the balloon payment, hand the car back and walk away – no strings attached. If, toward the end of your agreement, the car is worth more than the MGFV, you can use the difference between the final payment and the car’s market value as a deposit for your next car on PCP or HP. It’s quite common for the value of a car at the end of the PCP agreement to be higher than initially predicted (i.e., it has depreciated slower than initially calculated in the MGFV at the start of the contract).

How is the MGFV balloon payment calculated? Almost all cars depreciate, but one of the most reliable predictors is the miles driven. A PCP agreement is based on the predicted number of miles you will drive each year, where higher quotes will tend to make a car depreciate faster (due to wear and tear). You’ll be quoting this to the finance company since the car will always be their property (unless you pay the balloon payment), so it’s best to be accurate so that MGFV is fair, and you won’t get in any trouble. Some of the benefits of PCP financing are shown below:

  • The option for low monthly payments is attractive to many since it can be tied into anybody’s monthly expenses with ease.
  • You are given many options at the end of the agreement, so you don’t need to make a solid decision right away.
  • Sometimes the car manufacturer you’re buying from will contribute to your initial deposit. Additionally, the interest rates are incredibly low on PCP and the option to use the remaining value of your car to pay a deposit on a new one is very appealing.
  • You can trade in your car for a new one every few years without the worry to sell. Because of this, you will always benefit from the latest tech, the most efficient engines, and non-existent maintenance visits.

Final Thoughts

It’s typically the trend that as things around us become more abundant, they become more accessible. There are now more cars than ever before, and this allows them to be hired, rented, and financed as if they were mobile phones or a Netflix subscription – it goes with, not against, the grain of modern society. Many have hopped on board already, but the hesitancy lies in the idea that an additional monthly expense will be taking money out of your pocket, not putting any back in it. This conception is far from the truth.

Bypassing the need to save thousands of pounds to buy a used car and spending even more to maintain it gives you freedom. Freedom to invest that lump of money in something more important. Freedom to drive without the worry of constant maintenance. Freedom to choose how much to pay and for how long. Freedom to upgrade to a newer car (with all its benefits and gadgets) every few years. Freedom to save in the long run. Ultimately, the decision between HP and PCP financing is up to you – but joining this shift in the way we own cars will undoubtedly put the joy back into your car ownership.

If you need help deciding your next financing plan or would like to start saving with a new car, speak to one of our experts via our contact page today. We look forward to seeing you.