Hire Purchase (HP) vs Personal Contract Purchase (PCP)

Hire Purchase (HP) and Personal Contract Purchase (PCP) are two popular types of car finance agreements.

When you buy a car on finance, you essentially borrow money from a finance lender. You pay an initial rental at the start and then make monthly rentals to repay your debt for the length of your agreed contract. Depending on the type of finance agreement you choose, there are differences in the amount you pay and your alternatives at the end of your term. 

Here at Nationwide Vehicle Contacts, we have put together a short guide to explain Hire Purchase vs Personal Contract Purchase so you can decide which finance agreement is best for you.

What is Hire Purchase?

Hire Purchase (HP) is a method of paying for a car in instalments while you use it. With an HP agreement, you make a deposit and agree to a fixed monthly repayment schedule and interest rate rather than paying the entire amount of the vehicle upfront.

The total amount you borrow will be repaid over time in equal monthly instalments. HP contracts typically tend to last three or four years, and at the end of the contract, you will own the vehicle and have fully repaid the amount you borrowed. 

HP monthly payments are calculated on the deposit amount, the duration of your contract, and any interest rates and purchase or contract fees. Lower monthly payments are typically the result of larger deposits and longer contracts, but you'll pay more interest over time, so you can end up paying more for the vehicle overall.

What is Personal Contract Purchase?

Personal Contract Purchase (PCP) is a method of paying for a car by splitting a percentage of the vehicle's value into a deposit and low monthly payments over an agreed period which is typically 24 to 48 months. When taking out a Personal Contract Purchase agreement, you essentially pay back the difference between your deposit and the amount the finance company estimates the car will depreciate during the term of the contract. This is called the minimum guaranteed future value (MGFV).

The MGFV varies between cars, trim levels and engine sizes. The car's mileage at the end of the contract and the agreed length of your contract will also impact the MGFV. The higher the mileage and the older the car gets, the less valuable it will be at the end of the contract, so the more you'll have to pay each month.

With PCP at the end of the agreement, you'll typically have three options, the most popular one being to trade the car in for a new one paid for using a new finance agreement. The second option is to pay a lump sum payment, often known as a balloon payment if you wish to own your current car outright at the end of the agreement. The third option is just to give the car back and walk away at the end of your finance term.

Read more about PCP in our Personal Contract Purchase Explained guide.

Key similarities and differences between HP and PCP

Hire Purchase and Personal Contract Purchase are similar in that you borrow money and pay it back in monthly instalments. In both finance agreements, you make an up-front deposit at the start and monthly payments after. 

However, the big difference is that with Hire Purchase, you pay off the vehicle in monthly payments and own it at the end of the agreement, whereas with a Personal Contract Purchase, you have lower monthly instalments and options to keep, trade or leave the vehicle at the end of the agreement. Below are some key features of the two car finance agreements.

Hire Purchase (HP) key features:

• Available on new and used vehicles 
• Variable deposit, from as little as zero in many cases
• You can spread payments out over a term to suit you, typically up to 60 months
• No mileage or condition penalties as long as you complete the contract and take ownership
• Overall you pay less interest than with PCP, as you're paying off the remaining finance faster
• At the end of the contract, the car is paid off, and you own it, so you can decide to keep it or sell it

Personal Contract Purchase (PCP) key features:

• Available on all new vehicles, but typically just on used vehicles under five years old
• Variable deposit, from as little as zero in many cases
• Manufacturer discounts, often known as deposit contributions, or freebies, such as free or cheap servicing, are frequently offered on new cars.
• Low monthly payments pay off the difference between the initial price and the predicted value at the end of the contract, including interest.
• You don't own the vehicle at the end of the term, you can either trade the vehicle in or return it to the financier.
• Option to own the vehicle by paying a final balloon payment which is set at the start of the contract

Other finance options

Hire Purchase (HP) and Personal Contract Purchase (PCP) are the two most common types of car finance. However, if you are after getting behind the wheel of a shiny new car, there are other alternatives, such as car leasing, which offers several advantages for many users over both HP and PCP. 

Below are some other forms of personal leasing types and contracts.

Personal contract hire (PCH)

Personal contract hire is also known as personal leasing and is essentially a long-term vehicle rental agreement. It is a solution for private individuals to drive a brand-new vehicle affordably and is an increasingly popular alternative to buying brand-new vehicles among car users.

Personal contract hire works by paying a monthly fee to rent the vehicle throughout your contract and then returning the car at the end of the agreement, leaving the finance company to handle the depreciation value and disposal of the vehicle.

Read more about PCH in our Personal Contract Hire Explained guide.

Personal Lease Purchase

With a Personal Lease Purchase contact, you decide that you will buy the car at the end of the term. It allows you to finally get a new car without having to come up with the complete sum at once. A lease purchase differs from other contracts as it excludes any maintenance or added value services, such as those included in a PCP contract.

Read more about Personal Lease Purchase in our Personal Lease Purchase Explained guide.

Still have a question about car leasing?

Call Nationwide Vehicle Contracts on 0345 811 9595 to speak to one of our skilled advisers to find the right car lease special offer for your needs.