Car Finance Explained: Is Hire Purchase, Contract Purchase or Leasing Right for You?

Although the different car payment methods may seem a little confusing at first, they are structured in a way that may help your budget go a little further. By picking the type of car financing that best suits your financial situation, you may be able to afford a model that you thought was well out of your budget.

To help you make the all-important decision of how you’re going to pay for your car, be sure to check out this guide to all-things car finance before you sign on the dotted line.

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We’ll define the three main types of car financing (Hire Purchase, Personal Contract Hire and Personal Contract Purchase) and run through their respective pros and cons along the way. If you’re interested in learning more about a specific option, feel free to jump to it using the links below.

What is Hire Purchase (HP)?

Hire Purchase (HP) is a finance agreement that involves paying an initial deposit, although some lenders do not require a deposit, after which a finance company hires you the vehicle for the period of the agreement and then sells you the car for the Optional Final Payment, usually just £10, when all the contracted payments have been made. The amount financed is paid back in fixed monthly instalments over an agreed period; the deposit size and monthly payment amount will be determined by the cost of the car, the interest rate (APR) and the length of your agreement.

After the agreement has been paid off, the car is yours outright. This means HP agreements don’t include any terms and conditions regarding mileage or wear and tear.

What are the pros of Hire Purchase?

  • You outright own the car at the end of the agreement
  • You can choose the length of the agreement period, which is usually 12-60 months
  • There are no fines for wear and tear
  • There’s no mileage limit
  • You have additional protections under Consumer Credit and Consumer Rights legislation

What are the cons of Hire Purchase?

  • You won’t own the car until the final payment
  • Monthly payments will be higher than those in a Personal Contract Purchase over the same period of agreement
  • No legal right to sell the vehicle until the agreement has been paid

Is HP the right option for me?

If you want to eventually own the car, and you have a budget that suits fixed monthly repayments, then a Hire Purchase is potentially a good idea. Likewise, a disposable income that’s unlikely to decrease over the agreement term will stand you in good stead.

What is Personal Contract Hire (PCH)?

Also known as leasing, Personal Contract Hiring (PCH) is much like renting a vehicle when you’re on holiday – just for a longer duration of time. You’ll pay a sum up front, followed by regular monthly payments before you give the car back.

You’ll sign a contract with the lease provider in order to determined how many miles you can cover along with the size of your monthly payments, which is usually calculated as a multiple of the monthly payments.

What are the pros of Personal Contract Hire?

  • Allows for fixed-cost motoring
  • No depreciation risk
  • If optional service and maintenance are added, one fixed monthly payment covers all the vehicles running costs.

What are the cons of Personal Contract Hire?

  • Payments are less flexible than other financing options
  • You can’t keep the car once the agreement ends, nor do you have the option to purchase
  • Your mileage is limited, and there are penalties for excess wear and tear

Is PCH the right option for me?

If you don’t want to own a car, like to be able to change vehicles at fixed intervals, PCH is a good idea. Additionally, if you’re the kind of person who likes driving cars that you wouldn’t normally be able to afford, then this may be the finance option for you.

What is Personal Contract Purchase (PCP)?

Similar to the above, a Personal Contract Purchase (PCP) involves an initial deposit, a series of monthly payments and the return of the car to the finance company, provided it’s in a reasonable condition for its age and mileage.

This time around, however, if you decide you want to keep the car, you’ll have the option to buy it outright in return for the final payment, also known as a “balloon payment”.

This price, along with the monthly amount, depends on the size of the deposit, the cost of the car, its interest rate and how much the finance company calculates the value to be at the end of the agreement. This amount is known as the Guaranteed Minimum Future Value (GMFV).

A PCP contract will usually set out the expected condition of the car upon return, as well as how many miles you’ll be allowed to cover.

What are the pros of Personal Contract Purchase?

  • Lower monthly payments than HP for agreements over the same period
  • Flexible deposit amount
  • You can choose the length of the agreement, usually somewhere in the range of 24-48 months
  • No obligation to keep the car at the end
  • Can be paid off early, though the terms have to be agreed upon
  • You have additional protections under Consumer Credit and Consumer Rights legislation

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What are the cons of Personal Contract Purchase?

  • You don’t necessarily own the car after paying off all your monthly payments
  • You’ll pay for any excess mileage beyond your contracted amount should you hand the car back to the finance company
  • If the car is returned with excessive wear and tear, then you’ll have to pay extra

Is PCP the right option for me?

If you’re looking for lower monthly payments than other financing options, but also like the flexibility once you’ve reached the end of your agreement, then opt for the PCP option. Likewise, people who are confident of the mileage they’ll rack up and can accurately determine how much they’ll need would do well to go for it.

We hope you’ve enjoyed this article. Looking for more from Brindley Garages? Head here to check out more news from the motoring world, or if you’re in the market for a new car, see how we can help on our homepage.

Added: 27 August 2019

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