Understanding which car finance option is right for you – HP or PCP/Lease

Hire purchase (HP) is something that most people are familiar with. It is a form of credit that people across the world have been using for decades. In some places, for more than a hundred years. HP enables people to buy expensive items immediately instead of having to save enough money to be able to own them outright.

Low incomes and poor public transport behind high rates of car financing

Without HP most people would have to wait many years to be able to own more expensive items, especially cars. For many, this would be a disaster. In most places, public transport does not run at convenient enough times to make relying on it a viable option. Often, it is expensive, overcrowded, and unreliable. Not owning a private car greatly narrows down your options. It impacts where and when you can work. As well as whether you or your children can get to a decent school or college to study. It also makes socializing, joining clubs, and pursuing your interests more of a challenge.

The majority of consumers use car finance

So, when they can, most people buy their car with finance. According to Statista in America, nearly 80% of new car purchases are made this way. In the UK 40% of people who have an income of £50k ($61k) or less used finance to buy their car. Again, this is according to Statista.

However, how much they pay for this service varies greatly. Those consumers who understand what their options are and how to find the best deals can easily end up paying hundreds less for their vehicles.

What is HP?

Hire Purchase is a financial agreement that typically involves three parties. The buyer, the seller (dealership), and the financier (the loan company). When you have chosen a car and worked out how much of a deposit you can put down you work out how much you need to borrow.

Once you have found a financial institute, the dealer gets paid your deposit and the money you have borrowed. That enables you to drive the car away. At that point, both you and the finance company own a stake in the vehicle.

With each monthly payment you make you build up your ownership equity. Once the last installment has been paid you become the sole owner of the vehicle.

You will be charged interest by the finance company you borrow from. How much that will be is outlined in the contract and your monthly payment usually includes the interest.

How is HP different from PCP?

PCP stands for Personal Contract Purchase or Personal Contract Plan. It is a relatively new form of car financing that is quickly becoming equally as popular as HP in the UK. In the USA, this form of car financing would be known as a lease.

The purchasing part of the transaction works in more or less the same way as the Hire Purchase does. But, often, the monthly payment of a PCP or lease deal is lower than it is for HP.

When the last monthly payment is made, if you want to become the sole owner of the vehicle you will have to pay what is called a balloon payment. But you also have the option to hand the keys back and look for another vehicle. If you do that you will have been effectively leasing the vehicle from the finance company. Sometimes they will allow you to renegotiate your loan and set up a contract for another vehicle.

A word of caution

The above is simply an overview of the two most common forms of car finance. It is designed to help you to understand how they work but is not professional financial advice. So, you will need to do more research and read the terms and conditions in full before you sign any financial agreement