HP vs PCP
As you might know, there are more than a few ways of financing a car purchase. Among numerous methods, hire purchase and personal contract plan stand out as the most common ones, thus also well known. If you're buying a car, there's a big chance that you will choose one of these two, so today, we will compare them to see the similarities and differences between them, and to help you find out which one suits your needs the most and why.
Hire purchase is among the oldest purchase methods. Essentially, it divides the price of a car into multiple monthly instalments. After paying the initial deposit which usually sits at around 10% of the car's price, the buyer chooses the number of monthly payments spreading from one to five years. After the final rate has been paid, a buyer becomes the owner of the car.
The final price of the car has other factors included, such as interest rates or additional fixed fees. It is imperative to know that you'll pay more in the end if you choose a longer deal over a shorter one due to interest rates. So, if you can afford to pay a higher amount of monthly payments during a shorter period of time, you'll benefit in two ways – by paying a lower total price, and by becoming the owner faster.
Personal Contract Purchase
Compared to hire purchase, personal contract purchase is a newer way of financing a car purchase. In this type, payments are divided into three stages. The first one is the initial deposit, and the second one is monthly payments. The third and the final one is so-called balloon payment.
The final payment is where these two methods differ. If you choose to go the PCP way, you'll follow the same process you'd go with HP: after paying a deposit sum, you'll be given a plan of monthly rates, usually in three years, and they'll be significantly lower than rates for 3-year hire purchase. The reason for that is that you're not covering the cost of your car, but its depreciation during the agreed term. Almost every vehicle depreciates over time, and manufacturers have exact calculations which will assess the vehicle's future value. So, every car is given a guaranteed minimum future value, which is what manufacturers project the vehicle will be worth in three years.
During a three-year PCP plan, rates that you'll be paying are actually the difference between a brand new car and its value in three years. Because you're not paying off the car in whole, you'll be rewarded by lower monthly payments, but if you wish to become an owner, the balloon payment awaits.
During your PCP plan, you also have to commit to servicing the car regularly and according to manufacturer's recommendations, and to keep it in good condition. You'll also be limited by a number of covered kilometres. If you go over the agreed amount, you will be expected to make further payments as penalties. Taking out a fully comprehensive insurance policy is also obligatory, and it could be costly if you choose the default dealer's policy without exploring the alternatives from other insurance companies. Leaving a PCP agreement before the contract expires will leave you penalised as well.
What happens at the end of the PCP plan is the least appealing part of this method if you wish to keep the car. Essentially, you'll have three options: to make a balloon payment to become the owner of the vehicle, to turn back the car to the dealer, or to use equity to finance the next PCP plan.
HP vs PCP in real life
So, how do these two plans translate into specific examples? The all-new Hyundai i30 1.4 Petrol starts from €20,245, meaning that the deposit is €2,000. If you go for HP with 5.9% interest rate, your monthly payments could range from 1,569€ for a one-year contract to €554 for three years or €351 for a five-year contract. In the end, your payments would total to €20,828, €21,944 or €23,060 respectively.
A three-year PCP for the same car starts with a €7,086 deposit and 36 payments of €219 or €7,884 in total. The balloon payment will be €7,896. At that point, it's up to you to decide whether you want to trade it in for another car, leave it at the dealer's or make the final payment and own it.
Speaking in numbers, a three-year HP will cost you €21,944, while the same PCP will set you back €14,970 if you leave the car or start a new plan, or €22,866 if you make the balloon payment. So yes, the PCP could potentially cost you more during the same three-year period, but only if you keep the car. In two remaining cases, you'd spend less cash on monthly fees, and you can take a new car all over again.
What plan should you choose?
If you're attracted by monthly rates, and if you're a responsible driver who will commit to servicing the car regularly and keeping it in good condition, a PCP plan is an excellent choice for you since it leaves you with options after the payment period has passed. The competition between the manufacturers can get you a great deal, but even then, you should calculate wisely and take various factors into account. On the other hand, there's a danger of penalties for covering more kilometres than agreed upon in the contract, or for any damage caused.
If you are deterred by the idea of making payments without having an asset by the end of the contract, or if you don't want to cash out a relatively large sum of money to obtain the car in the end, you should skip PCP and go for HP. The most significant upside of hire purchase is that you'll own a car when the rates are paid off, but the monthly rates will be higher, and you'll end up paying more in the end if you opt for a longer plan.
Whatever plan you choose to finance your car purchase, make sure to explore different options from different financial institutions and read the terms of the contract thoroughly. Only then, you'll be completely sure that you've got a great deal, and you'll be able to enjoy your car to the fullest.