When you’re getting a car on finance, two of the main options you have available are personal contract purchase (PCP) and hire purchase (HP). Both require monthly payments, but there are key differences between the two.

Here we’ll compare HP vs PCP to help you understand which may be the best choice for you.

What is PCP Car Finance?

With PCP car finance, you’ll pay for a car over time instead of upfront. You’ll first put down a deposit for your car – usually 10% - then make monthly payments. There will also be an annual mileage allowance as part of the deal. At the end of the term (generally three to five years) you’ll make a larger payment – known as a balloon payment, to buy the car outright. If you don’t pay this, you can opt to walk away or use the equity as a deposit for a different car on a new PCP deal.

Pros and Cons of PCP

Advantages:

• Your monthly payments will likely be lower than other forms of car finance like HP
• You can choose whether to buy your car at the end of the deal
• PCP finance often helps you afford a newer or more expensive car.

Disadvantages:

• If you miss payments you could lose the car
• If you can’t afford the balloon payment, you won’t own the car at the end of your contract
• You will be charged for any excess mileage over what you agreed to
• In most cases, the car must be worth more than £10,000 to get PCP car finance.

What is Hire Purchase?

Hire purchase is another form of car finance that allows you to spread out the cost of buying a car. Like PCP, you first pay a deposit towards the car then make fixed monthly payments until the end of the contract.

With HP there’s a small ‘option to purchase’ fee included in your final payment. Once you’ve made the final payment, you own the car outright.

Pros and Cons of HP

Advantages:

• Once the contract is up and you’ve made all the payments, the car is yours
• There won’t be a mileage restriction like there is with PCP
• You may be able to get HP with a poor credit history.

Disadvantages:

• You don’t own the car outright until you’ve made the final payment
• Your monthly payments may be higher than PCP
• You can’t sell or modify your car until you’ve paid it off in full.

What’s the difference between PCP and HP?

The biggest difference between PCP and HP comes at the end of the contract and relates to how the car is valued.

With hire purchase, you own the car once you’ve made your final payment. Each monthly payment goes towards paying off the full value of the car. That’s why there are no mileage limits on HP as the lender isn’t expecting to get the car back at the end of the contract.

With PCP, you’re only paying off a portion of the car during the term and need to make what’s called a balloon payment at the end of the contract to buy it outright. If you can’t afford this, or don’t want to keep the car, it will go back to the lender. Or you can either walk away from the car or use the equity you’ve built up to get a new PCP deal.

Your PCP payments are also based on the ‘guaranteed minimum future value’ of the car. A prediction of what it will be worth at the end of the contract. This is determined when you take out the PCP, which is why your mileage will be limited. The more miles you drive, the less the car is worth.

Comparing HP and PCP

When it comes to choosing the right car finance for you, it’s helpful to look at the specifics of both HP and PCP. The following table should help:

Let’s look at it in a little more detail:

• Cost: You’ll need to pay an upfront cost for both PCP and HP as a deposit. This is usually around 10% of the value of the car for both.
• Monthly payments: For both HP and PCP, you’ll pay fixed monthly payments. These will likely be higher for HP for an equivalent car than PCP as there’s no balloon payment with HP.
• Structure of the payments: With HP, every payment goes towards the total value of the car. Once the payments are done, you own the car. PCP finance contracts are structured slightly differently in that they are based on the guaranteed minimum future value. This is how much the car is projected to be worth at the end of the deal.
• Mileage allowance: How many miles the car has driven plays a part in calculating the guaranteed minimum future value. When you take out the finance, you’ll agree on a mileage allowance with the lender. If you go over this, you can be charged.
• Fair wear and tear: As PCP is structured around the value of the car when you hand it back, you can also be charged for damage and maintenance over and above fair wear and tear. This isn’t the case with HP.

When should I choose PCP?

PCP makes sense if you:

• Like to trade your car in for a new model every few years
• Want to make smaller payments
• Are concerned about the car depreciating.

When should I choose HP?

You could opt for HP if you:

• Want to keep the car at the end of the agreement
• Are happy to make bigger payments towards eventually owning the car
• Don’t want to stick to a mileage limit or get billed for any maintenance issues.

Can I get a 0% finance deal?

It is possible, but not usually the norm. Some finance providers offer deals with 0% APR for part of the contract. In some cases, it’s even for the full length of the contract. Your credit rating will likely play a role in this, and everything will be at the discretion of the lender and the dealer that you’re looking to buy the car from.

In most cases, this kind of contract will involve larger deposits and larger monthly payments, so the dealer can move the car on quickly.

Other car finance options

HP and PCP aren’t your only two car finance options. You may also consider a car loan. When you take out a personal loan to buy a car, you’ll purchase the vehicle outright at the start and pay the lender the money back, plus interest, through your monthly payments.

You can modify or sell the vehicle, and you’re not stuck with mileage allowances or worries about wear and tear.

How Asda Can Help

At Asda, we’re here to assist you with any questions about car finance. Our financial support section is packed with useful advice and help, so you can make the financial decisions that best suit you.

Plus, we can also assist you with a personal car loan. Our wide panel of UK lenders provide offers based on your personal credit situation and are tailored to your specific borrowing needs.

Compare car finance deals using a trusted panel of lenders today!

PCP vs. HP FAQs

Is it better to PCP than HP?

It really depends on you and what you want to get out of the agreement. If you’re happy to trade your car in after a few years and want to make lower monthly payments, PCP might be the right choice for you. If you’re more interested in owning the car outright at the end of the deal, HP might be a better option.

What are the negatives of PCP?

Some of the negatives of PCP include the balloon payment at the end of the deal to own the car outright, the mileage allowance, and the fact you can lose the car if you miss any of your payments.

Why is HP more expensive than PCP?

HP is often more expensive than PCP as every payment goes towards the full value of the car. Once you make all your payments, you’ll own the car outright.

Do you own the car at the end of HP?

Yes, once you’ve made your final payment on your hire purchase agreement you will own the car outright.

Can you pay off HP early?

Yes, you can pay off your HP car finance early, but you may need to pay a fee. If you pay less than £8,000 early you shouldn’t be charged a fee. For anything over this, you’ll need to pay the outstanding capital, plus the lowest of the following three amounts:

• 1% of the amount repaid early
• 5% of the amount repaid early if there are less than 12 months left on the contract
• The remaining interest.

Can you end a PCP deal early?

Under the Consumer Credit Act, you can end your PCP finance early so long as you’ve paid over 50% of the total finance. You hand the car back and it’s the end of the contract or you can use the equity you’ve built up in the car to switch to a new PCP deal on a different vehicle.

Can I switch from PCP to HP?

Yes, it is technically possible to switch from PCP car finance to HP. This will depend on how much of the value of the car you’ve paid off and the terms of your agreement with the lender.

Do you own the car at the end of PCP?

You only own the car at the end of your PCP contract if you make the final balloon payment. If you don’t want to pay this or can’t afford to do so, you’ll either hand back the car or use the equity for a new PCP deal on a different car.

What happens if a car is written off on HP?

After a write-off, the car remains the property of the finance company until the finance has been paid off. In most cases, the insurance company will have the liability to pay off the pre-accident market value, minus any excesses. This will go towards paying the finance off.

Can you sell a car that has HP on it?

No, while the car is under the HP agreement it remains the property of the finance company. You can’t sell it until you’ve made your final payment.