Difference Between HP and PCP

We’ve outlined some of the differences between Hire Purchase (HP) and Personal Contract Purchase (PCP) to help you make a more informed decision.

HP could be right for you if you wish to own the car at the end of your agreement, and you can do so by paying back the full value of the car over the agreed finance term.

PCP could suit you if your priority is to keep monthly payments at their lowest. It could also suit you if you are unsure of what your needs may be by the time you reach the end of your agreement. It may also be a finance product that is more suitable for where you do not wish to own the car at the end.  For example, it might be your intention to upgrade your car at the end of term.

Monthly repayments:

Hire Purchase (HP)

Your monthly repayments are determined by the price of the car at the start of your agreement, the size of your deposit and the length of your agreement. Over the duration of your contract, you repay the full cost of the car (with interest) plus a small option to purchase fee. That’s why HP monthly repayments are often higher than PCP monthly repayments. Overall however, a HP agreement can work out cheaper, as you are repaying the amount borrowed more quickly.

Personal Contract Purchase (PCP)

Your monthly repayments are determined by the price of the car at the start of your agreement, the size of your deposit, the estimated Guaranteed Minimum Future Value (GMFV) and your anticipated annual mileage. With PCP, you repay smaller monthly repayments and one larger payment at the end if you want to keep the car. This larger payment is known as the balloon or GMFV. Your monthly repayments will typically be lower than those on a HP agreement as you are only paying for the depreciation (value lost) on the car during your agreement, rather than the car’s original price. 

The end of the agreement:

Hire Purchase (HP)

  • You own the vehicle once you’ve paid your last agreed monthly repayment together with the small option to purchase fee. Over the course of your agreement you will have paid for the full value of the car plus any agreed interest
  • Unlike PCP you are not restricted to any mileage limits and can drive as many miles as you like
  • Having taken ownership at the end of the agreement, you have the choice to: keep the car, sell it or trade it in to put towards a deposit on your next car

Personal Contract Purchase (PCP)

  • During your agreement, you borrow the difference between the value of the car when you began the contract and its estimated future value at the end of the contract, which is called Guaranteed Minimum Future Value (GMFV)
  • The GMFV is the final lump sum you need to pay should you wish to own the car. This is estimated by the lender and based on the car’s loss of value over time and the annual mileage you agree to
  • A PCP agreement is set up based on your estimated mileage so it’s important you get this right from the start. If you exceed the agreed mileage you will be charged a penalty at the end of your agreement to compensate the lender for the increased loss of value the car might sustain as a result of having a higher mileage. Be aware that these charges can vary between lenders. An example of this can be found in our PCP product description
  • Should you choose to return the car at the end of the agreement, you’ll be required to hand it back in good condition. If it’s suffered any damage (incl. damaged wheels or interior) then you will be charged for any repairs
  • PCP gives you more flexibility than HP at the end of your agreement, as you can:
    • Buy the car by paying the final lump sum payment
    • Hand it back and pay nothing more
    • Part exchange it for a new car
  • If you would like to buy the car for the final GMFV amount, you could (subject to your credit status) arrange to finance the payment on a new HP agreement paying the new finance over a period of time
  • If you are concerned about your proposed car suffering a large loss of value, then PCP can offer you the benefits of lower monthly payments with the ability to hand back the car at the end of your agreement, no matter what it’s worth (subject to excess mileage and conditions charges)
  • If you wish to part exchange the car, the amount you will get towards a deposit for your new car will be the difference between the GMFV still owed to the finance company and the value the person/company offering to take your car places on it.
    • So, if for example the new car dealer values it the same as the GMFV, you will have no excess to put towards your new car
    • If it’s worth less than the GMFV you just hand the car back
    • If it’s worth more, you get the difference towards your new car
    • As a result, whilst lenders offering the highest GMFV might offer lowest monthly repayment it may well mean you need to save more towards your next car deposit as you will have less or no excess left at the end, compared to a credit with a slightly higher monthly repayment but lower GMFV

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Legal disclaimer: FairSquare Europe Limited is a company incorporated in England & Wales (Reg No: 08023305). and having its Registered office address at 3 Brindley Place, Birmingham, B1 2JB. FairSquare Europe Limited is authorised and regulated by the Financial Conduct Authority for credit-related regulated activities, Firm Reference Number 715086

We act as a credit broker not a lender. Fairsquare shall act independently in sourcing credit from our panel of funders.

As a credit intermediary, we maintain a panel of Lenders who are reputable and experienced in the motor finance industry and consumer credit sector and offer products and services to suit a variety of credit strengths.

FairSquare is committed to ensuring that applications for credit to finance your car are placed with the most appropriate funder for a transaction. As we act as a credit broker, we will receive a fixed commission for introducing you to a finance provider, any such amount a lender pays us will not affect the interest rate you pay under your finance agreement, all of which are set by the lender concerned.

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