If you’re new to the world of cars, it’s pretty tricky to know which is the best option for you. Do you take the plunge and aim for ownership with hire purchase? Do you go for Personal Contract Purchase and decide if you want to buy the car outright later? Or do you ditch the idea of ownership entirely and opt for Personal Contract Hire?
This article will give you a bit of background on each of the three finance options to help you make a more informed buying decision.
Only got five seconds to learn about the differences? Don’t worry, I’ve got you covered. Here are some bite-sized definitions of the three options.
PCP: The whole cost of the car is broken down into an initial deposit, monthly payments and a final (optional) balloon payment.
PCH: The depreciation of the car is broken down into an initial payment and monthly payments.
HP: The whole cost of the car is broken down into an initial deposit and monthly payments.
Condensed down to a two-line description, they all sound quite similar. But scratch away at the surface and things start to look pretty different.
In the next few sections, we'll look at each option in more detail. Let's get started.
What is Personal Contract Purchase
Personal Contract Purchase (PCP) is the most popular car finance option in the UK by a country mile. It works by breaking down the entire cost of a car into an initial deposit, a series of monthly payments and an optional balloon payment.
With PCP deals, the finance company owns the car all the way through the deal. At the end, you can choose to buy the car by paying the balloon payment, which covers the residual value of the car.
Remember that the balloon payment is optional, though, so you can always choose to walk away and leave the finance company with the car.
PCP is a good choice if you might want to but the car at the end of the leasing period but you haven't made your mind up yet. However, if you definitely want to buy the car, there are cheaper options out there.
Personal Contract Hire
Personal Contract Hire (PCH) is a pretty niche car financing option. Popular in the US and Germany, it's finally starting to find its feet in the UK.
PCH works by breaking down the depreciation of a new car over several years into a small initial payment and monthly payments.
It's basically long-term rental of a new car.
With PCH deals, the finance companies owns the car the whole way through and, at the end of a PCH lease, you return the car to the dealer and you both go your separate ways.
Hire Purchase (HP) works by breaking down the whole cost of your car into an initial deposit and monthly payments. Once you make your last payment, you officially own the car. (Okay, technically it's only when you make the Option to Purchase fee that you own the car but that's usually bundled into your final payment.)
It's the most simple of the three finance options because you pay off the whole cost over the course of the contract.
It's pretty important to point out that with an HP deal you don't own the car during the contract. Your finance company owns the car right up until you pay the final instalment, which officially transfers ownership to you. So, if you want to sell or modify your car, you'll need to go through your finance company.
Also, if you miss hire purchase payments, your finance company can repossess the car, leaving you with nothing for all your investment.
What are the benefits of PCP, PCH and HP?
Now you know what PCP, PCH and HP are, we can start talking about what's good and bad about each of them.
Let’s start with price. Which finance option is cheapest on a day-to-day basis?
PCH deals tend to be the cheapest because you’re only paying for the depreciation and the broker's profit. PCP is a close second because your deposit and monthly payments only cover part of the car's value, leaving a whole load of the value in the balloon payment. HP, on the other hand, tends to be the most because you're paying off the whole cost of the car during the contract.
However, it's important to remember that the outcomes of PCP, PCH and HP are all very different.
Next up, what about ownership?
HP is the only finance option that's designed so you definitely own the car at the end of the deal. If you make all your payments and keep to the T&Cs, you will own the car at the end of your deal.
PCP deals are a little more complicated because you have the option to buy the car at the end of your deal. However, the balloon payment is usually pretty large and can be tricky to pay off in one go.
And then there are PCH deals. With PCH deals, the car is always returned to the leasing provider and you usually don’t have the option to buy it. Sometimes leasing brokers will sell the car to you but you can't rely on that being an option.
With all three deals, your finance company retains ownership during the contract.
What about if you want to change your car every few years?
This is sort of linked to ownership. With PCP and PCH, you can hand your car back to the broker at the end of the contract and walk away. After that, you can choose to take out another deal. If there's any equity left in your car, you can sometimes roll it into a new deal.
With HP deals, however, you own the car at the end of the deal. So if you want to refresh your car every few years, you've got all the hassle of a private sale.
Finally, what about your upfront payment?
All three options have an initial payment or a deposit and with all three deals, a higher initial payment or deposit means a lower monthly payment.
Want to know more?
Or, if you've already decided to go with leasing, why not jump over to LeaseFetcher and find your perfect next car.