Does car finance baffle you?
Struggling to understand what the difference is between Hire Purchase and Personal Contract Purchase (PCP)?
Here we have put together a guide, which explains each one, and how they differ…
Hire Purchase (HP) finance – What is it?
Hire Purchase (HP) is a fixed-term car finance agreement, usually anywhere between 24 and 60 months. You will have a fixed monthly payment across the term you choose. The monthly payment will be calculated based on your deposit, term and the interest rate you are offered, which is subject to status.
A Hire Purchase (HP) agreement means you will own the car at the end of the agreed term, after repaying the agreement in full. Until you have repaid the full amount you will not own the car.
There are no mileage restrictions with a HP agreement and you are free to use the car as much or as little as you like.
What are the main benefits of Hire Purchase (HP)?
- It offers flexible repayment terms to help fit in with your monthly budget.
- Often you will only need a relatively low deposit – this can be anything from zero to usually around 10% of the car’s value.
- Fixed interest rates so you know exactly what you’re paying every month for the length of the term.
- There are no mileage restrictions.
- There is no balloon payment at the end.
- Once you have made the last payment you will own the car.
Personal Contract Purchase (PCP) finance – What is it?
Personal Contract Purchase (PCP) is a variation of a Hire Purchase agreement.
The main difference is that the value of the car at the end of the contract is calculated at the start of the agreement and this value is deferred. This is usually referred to as the Guaranteed Minimum Future Value (GMFV) and is based on factors such as how old the car will be and how many miles it is expected to have covered at the end of the agreement. The GMFV is guaranteed by the lender and will not fluctuate. Deferring this to the end of the agreement means that your regular monthly payments will be lower than those on a comparable HP agreement over the same term.
A PCP agreement gives you the flexibility to decide whether you would like to own the car outright at the end of the agreement by paying the GMFV, or return the car to the lender and enter into a new car finance agreement on a new car.
There are mileage restrictions on a PCP agreement, and it is your responsibility to accurately calculate your annual mileage before taking out the agreement.
What are the main benefits of a Personal Contract Purchase (PCP)?
- Lower monthly payments than Hire Purchase for a comparable car and term
- Fixed monthly payments throughout the term of the agreement
- A low deposit at the start of the agreement
- Unless you opt-out, your agreement will be regulated which means you have certain legal rights and protections
- Flexibility at the end of the agreement on what you would like to do with the car
Hopefully, this will have given you a really good insight into car finance and how it all works!
At AvailableCar, we have over 5,000 quality used cars to choose from, with LOW RATE CAR FINANCE available!
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