Buying a car is an exciting venture, but navigating the world of financing one can be a daunting and confusing task. Understanding the various financing options available is crucial to making an informed decision that aligns with your financial goals. In this comprehensive guide, we’ll delve into four popular car finance options: Hire Purchase (HP), Personal Contract Purchase (PCP), Personal Contract Hire (PCH), and Personal Loans.
Common Features
First of all, let us start with common features between all, or most, of these financing options. Unlike buying your car in cash, car financing aims to spread the cost over a few years. This tends to come with some strings attached. One of which is making your payments on time. With the exception of personal loans, car financiers will repossess your car if you fail to keep up with the payments. Another common feature that HP, PCP and PCH share is that you do not fully own the car outright. In fact, with PCH, you never get to own the car. With that said, let’s dive deeper into each one of these options.
Hire Purchase (HP)
Hire Purchase is a financing option where you pay a deposit, followed by fixed monthly installments over an agreed-upon term. The term varies from 3 up to 7 years. With HP, you essentially hire the car until the final payment, at which point you gain ownership. Which means that contractually, you cannot sell the car to settle the balance. If you wish to sell the car while on HP, you will need to settle the balance first with the financier. Additionally, settling the balance may come with additional fees, so always check with your financier.
Other than that, HP comes with very little constraints and is well suited if you plan on keeping the car long-term. Find an overview of HP below:
- Ownership: Ownership of the car transfers at the end of the finance term.
- Monthly Payments: Fixed monthly payments, which make budgeting easier.
- Interest Rate (APR): The Annual Percentage Rate (APR) represents the total cost of borrowing, including interest and fees. HP often has a fixed APR, simplifying the calculation of monthly payments.
- Restrictions: No mileage restrictions apply. Restriction on selling the car apply.
- Flexibility: Ideal for those planning to keep the car long-term.
Personal Contract Purchase (PCP)
PCP is a more flexible, yet complex, option that combines leasing and buying. This is because with PCP involves paying lower monthly payments compared to HP, with a balloon payment at the end if you choose to keep the car outright. The balloon payment is an optional payment at the end of the finance term. You can then choose to hand the car back in, swapping it for a newer model, or paying the balloon payment to keep the car.
PCP Details
Car dealers will incentivise PCP holders to swap in their car by promising a residual value at the end of the term, which can be used towards the deposit of another car. Of course, the car needs to be in a great condition as stipulated in the contract to get that deposit contribution. This also will probably include a constraint on the mileage. See what some car dealers do with PCP is charge you for the following:
PCP payments = depreciation + some contribution towards owning the car + interest
They then estimate the value of the car at the end of the finance term to work out your balloon payment, calling it the guaranteed future value (GFV) which would be equal to:
GFV = the future value of the car – all contributions towards owning the car
Not all PCP providers do this. They may forego the ownership contributions and just charge you for the depreciation plus the interest. So at the end of the term, you don’t get anything back from them. This will leave you with lower monthly payments, but nothing towards owning this car or financing the next car at the end. You may also be in luck, and end up with a car that is more valuable than the guaranteed future value calculated at the beginning of the term. This will either reduce your balloon payment, or give you something towards your next car.
PCP Overview
As you can, PCP is quite a complicated arrangement. But to some up, this is how it stacks up:
- Ownership: You have the option to pay a large payment and buy the car at the end of the term or return it.
- Monthly Payments: Lower monthly payments make it budget-friendly.
- Interest Rate (APR): PCP typically offers variable APR, influenced by market conditions and creditworthiness.
- Restrictions: Mileage limitations may apply, with extra charges for exceeding them. GFV will come with condition requirements, so damage to the car will cost you if you choose to return the car. Restrictions on selling the car apply.
- Flexibility: Ideal for those who want flexibility at the end of the agreement or like to change their car frequently.
Personal Contract Hire (PCH):
Personal Contract Hire (PCH) is a hassle-free leasing option where you essentially rent the car for an agreed period. As the name implies, this is only a hire, so you do not own the car at any point. Also, given that it is a lease, car servicing, maintenance and insurance is usually included. Of course, given that this is purely a rental agreement, many restrictions apply on mileage, condition upon return etc.
An overview of PCH is as follows:
- Ownership: You return the car at the end of the contract; there is no option to buy.
- Monthly Payments: Potentially lower than both HP and PCP, making it budget-friendly.
- Interest Rate (APR): PCH usually involves a fixed interest rate, simplifying monthly payment calculations.
- Restrictions: Typically, mileage restrictions apply, and exceeding them incurs additional charges. Damage also incurs charges.
- Flexibility: Ideal for those who prefer lower monthly payments and enjoy driving a new car every few years.
Personal Loans:
Finally, an indirect way to finance a car purchase is by taking out a personal loan. Personal loans involve borrowing a lump sum from a bank or lender, which you then use to purchase the car outright. You can combine this option with our car purchasing tips to save a lot of money. This option may prove cost effective if you manage to secure a loan at low interest rates. This is doable if you have a good credit score.
Here’s what you need to know:
- Ownership: You own the car outright from the start.
- Monthly Payments: Fixed monthly payments simplify budgeting.
- Interest Rate (APR): Personal loans may have fixed or variable APR, depending on the lender and your creditworthiness.
- Restrictions: No restrictions apply.
- Flexibility: Ideal for those who want immediate ownership and flexibility in choosing a car. Works even better if you have a good credit score.
Comparing the Options
In summary, this is how the main four financing options compare.
| Hire Purchase (HP) | Personal Contract Purchase (PCP) | Personal Contract Hire (PCH) | Personal Loan | |
| Ownership | End of term | Optional at the end of term | No ownership | Outright |
| Monthly Payments | High | Medium | Low/None | Depends on Credit Score |
| Interest Rate | High | Medium | Low/None | Depends on Credit Score |
| Restrictions | Restrictions on selling | Restrictions on mileage Condition at end of term | Restriction on mileage Condition at end of term | None |
| Flexibility | Affordable car ownership (delayed) | Freedom to keep or swap the car | Swap cars affordably | Affordable car ownership (outright) |
Other Financing Options
There are other options that are not as popular as the ones above. We will quickly introduce these in case you come across them.
Lease Purchase
Lease purchase is very similar to HP with a couple of differences. These agreements come with lower monthly payments and a large balloon payment at the end of the term. Unlike PCP, this balloon payment is not optional and must be paid. Lease purchase agreements are not very common and are only available for brand new cars.
Balloon Hire Purchase
This is almost identical to lease purchase with one modification that increases flexibility: you get to set the balloon payment. This offers greater control over your payments.
Useful Websites
Explore your car finance options with these websites.
- Leasing.com: Car leasing comparison website, should be your go to for PCH deals.
- AutoTrader: The top marketplace for cars in the UK.
- InterestFree4Cars: Used car dealer offering 0% HP and PCP deals.
Conclusion:
We covered the most popular car finance options. Choosing between HP, PCP, PCH, and personal loans depends on your preferences, budget, and future plans. Assess your priorities, weigh the pros and cons, and make an informed decision to drive away with confidence and financial peace of mind.
