HP, PCP or PCH - Are you ‘confused.com’ about which type of Finance best suits your requirements?
I am often asked by buyers of both new cars and used cars about which sort of finance package they should choose and what the differences are in the finance options they are given - as I don’t mind which sort of finance you use, as long as it’s the best product for your circumstances, here is my explanation of the pros and cons for each type.
Hire Purchase – HP
Let’s start with good old fashioned HP – that is the simplest option to explain and most of you will I am sure have some knowledge of it, whether you have previously used this option to buy a car or furniture etc or have simply heard of it.
Very simply you spread the balance you need to borrow over the term, usually 3, 4 or 5 years, but it could be 26, 32, 42, or any number of months up to 60 months. With hire purchase you don’t always need a deposit, that will depend on your credit rating and ability to make the repayments, as responsible lenders will only lend you what you appear to be able to afford to repay, and that criteria is applied to all finance. The amount of money you need to borrow will have an element of interest added to the balance and then the total amount will be divided by the term (number of months it’s taken over), and spilt equally – that will determine your monthly payment. You can settle an HP agreement at any time, and with most agreements you will not be penalised and charged for any interest for the remaining months of the agreement. The most important aspect of Hire Purchase is that when you have made the last payment the car becomes yours.
Personal Contract Purchase – PCP
A PCP is a finance agreement, whereby you can own the car at the end of the agreement, but the balance financed is not repaid in full via monthly payments, as you can defer some of that balance until the end of the agreement, up to the value which the finance company sets as the ‘guaranteed future value’.
At the end of the term (which can be anything from 24 months to 60 months), you have three options (i) to pay off the final value making the car yours to keep, (ii) or hand it back to the finance company, with nothing to pay, but receive no equity, (iii) or to sell or part exchange it to anyone you choose, make the final payment and keep or use any surplus equity as a deposit for your next car.
With a PCP you would be asked for your anticipated annual mileage and this would form part of the agreement - if that mileage is exceeded and you wish to hand it back to the finance company at the end, you would incur additional mileage charges, but the lower mileage would have been reflected in the monthly payment – so if you set the mileage higher initially, the monthly payment would be higher, as the final value of the car will be lower due to it having covered more miles - also the car must be in a reasonable condition at the end of the term, if not charges may be made. The deposit required can vary from no deposit to as much as you would like to pay and obviously that would reduce the amount of the monthly payment.
Some of the manufacturers encourage customers to use PCP when financing a new car and provide tempting offers to do so – for example, Suzuki offer deposit contributions on many of their new cars when purchased using PCP finance.
You are also able to finance used cars with a PCp, again with a guaranteed future value, thus reducing the monthly payment
So to summarise, the PCP method of finance usually offers a lower monthly payment than HP, but at the end of the term a decision must be made whether to hand back, pay off or part exchange.
Personal Contract Hire – PCH
Personal Contract Hire is completely different from either of the above because you never own the car - you basically hire it for the term you agree initially, and pay 3, 6, 9 etc rentals in advance (equivalent to a deposit), the more rentals in advance the lower the monthly rental.
Personal contract hire offers the lowest monthly cost option, but has three big differences – (i) Firstly, you have agreed to hire the vehicle for the agreed term, so there is no settlement figure - if for any reason your circumstances change and you want to change your car, you will have to pay an early termination fee, which may be similar to the cost of the total rentals left to pay, hence you would end up paying for the car, even though you don’t have it, or you park it up and carry on paying for it. (ii) The other big difference is that when you return it, it’s like returning a hire car, so you will be charged for any damage to the car, and after say 3 years that could be quite considerable, and you will also have to pay for any additional mileage over the agreed amount, and finally (iii) there is no opportunity for you to have any equity in the car at the end of the term, as that will be the hire company’s when they sell it.
So the quick pros and cons.
- You will own the car - at the end of the term you keep the car with nothing further to pay.
- You can settle when you want. No charge for excess mileage or condition.
- Higher monthly payment
- No guarantee within the term of negative equity.
- Lower monthly payment than HP,
- Guaranteed future value at the end of the term so no negative equity at that point.
- Possible equity to use for deposit on next car.
- You must make a decision at the end of the term to either payoff the final deferred value, part exchange/ sell or hand back
- Possible excess mileage/condition charges
- Lower monthly payment.
- Fixed rental period
- Condition charges
- Expensive to exit early
- No equity at end of agreement.
For any further information, contact a member of the sales team on 0113 2712288 or email firstname.lastname@example.org or myself, Robin Luscombe, via email email@example.com or call my mobile 07984 647938
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