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PCP, PCH or HP? Car finance explained

Our guide explains three of the most popular ways to finance your car to help you decide which is right for you

In 2015, 8 out of 10 cars were purchased on finance.

In 2015, 8 out of 10 cars were purchased on finance.

Deciding how to finance your car is an important decision which many of us are increasingly making. According to the Finance & Leasing Association, 8 out of 10 new cars were purchased on finance in 2015.

But how much do you know about it?

This guide will talk you through four finance plans available through Arnold Clark – Hire Purchase (HP), Personal Contract Hire (PCH), Personal Contract Purchase (PCP) and Personal Loan (PL) – to help you decide which is right for you.

Hire Purchase (HP)

If you choose to pay for your car with a Hire Purchase agreement, you will normally pay an initial deposit and will pay off the entire value of the car in monthly instalments. When all the payments are made, the Hire Purchase agreement ends and you own the car.

Pros

  • You’ll be able to drive away a car that you may not have managed to buy outright.
  • Unlike a PCP or PCH contract, you won't need to estimate your mileage at the start of your Hire Purchase agreement, so you'll avoid excess mileage charges.
  • Once you’ve made your final monthly payment, including the option to purchase fee, you'll have full ownership of the car.

Things to bear in mind

  • Monthly payments may be higher than some other finance options, such as PCP, as you're paying off the full value of the car.
  • You won’t be able to sell the car without settling the finance.
  • You won’t own the car until you have made all of your repayments.
  • You’ll need to keep the car properly insured, maintained and in your possession until the full value is paid off.

Personal Contract Hire (PCH)

Personal Contract Hire (PCH) is a type of long-term rental that will suit you if you’re not looking to buy the car at the end of your contract and won’t need to change the car before the end of the contract. You lease the car for an agreed period of time by making fixed monthly payments. When the contract expires, you simply return your car.

Pros

  • It’s hassle free, as you can drive away a new car without worrying about how you'll re-sell it.
  • Most leasing companies will offer an option with maintenance built in, eliminating unexpected repair bills.
  • Your monthly payments on the car will be much lower than if you were buying it
  • You will have access to new cars that you may not have been able to afford to buy.

Things to bear in mind

  • There’s no option to buy the car at the end.
  • You will need to agree an annual mileage allowance at the beginning of your contract – there may be a mileage charge if you exceed this.
  • Just like your mobile phone contract, you are tied in for the full duration of the agreement and there may be significant charges if you need to change or stop the contract.

 Personal Contract Purchase (PCP)

Personal Contract Purchase (PCP) is similar to a Hire Purchase agreement as you will usually pay an initial deposit, followed by monthly instalments.

What makes PCP different is that your monthly instalments are paying off the depreciation of the car, and not its entire value, over the course of the term. Then, when you get to the end of your agreement, there is a final, balloon payment that must be made if you want to keep the car.

How does PCP actually work?

At the start of your PCP contract, a Guaranteed Future Value (GFV) of the car is set. This is the car's expected value when your contract ends.

For you, this means that the money you’re repaying is the difference between what the car is worth now and what it will be worth at the end of your contract (the depreciation) plus interest, which is calculated on the full value of the vehicle. You'll pay this difference off in monthly instalments.

Remember: you are still liable for the full amount of the vehicle if anything happens to the car or if you settle early.

This means lower monthly payments for you, but you will need to pay a final payment at the end (the Guaranteed Future Value) if you want to keep the car.

Once your agreement is finished, you’ll have three options:

  1. Buy the car by paying the final balloon payment (the Guaranteed Future Value).
  2. Hand the car back - your finance company has already predicted the Guaranteed Future Value of the car, so handing the car back will settle the deal.
  3. Part exchange for a new car.

Find out more about what happens when PCP car finance ends.

Pros

  • Monthly payments on a car financed by PCP are usually lower than if your car is financed by a Hire Purchase agreement.
  • If you decide not to buy the car, you can simply walk away when you've made all the payments.
  • Similar to PCH, you can drive away a new or used car every few years (dependent on the chosen term) without worrying about selling it on.
  • If your car is worth more than the Guaranteed Future Value then you can use that equity towards a deposit on a new car.

Things to bear in mind

  • If you want to buy the car you will need to pay your final balloon payment (the Guaranteed Future Value).
  • Similar to PCH, you will need to agree on a mileage allowance at the beginning of your contract and there may be excess mileage charges if you exceed this.
  • You won’t be able to sell the car without settling the finance.
  • You won’t own the car until you have made all of your repayments.
  • You’ll need to keep the car properly insured, maintained and in your possession until the full value is paid off.

Can I settle my PCP deal early?

You can normally settle your deal early, however the finance company will require you to pay off the difference between what your car is worth now, and what you still owe (negative equity). On the other hand, you may find that at the end of your term your car is worth more than the Guaranteed Future Value, which means you’ll have some positive equity to contribute towards your next car.

Personal Loan (PL)

Another way of financing your car purchase is through a personal loan. The amount can be for the full purchase cost of the vehicle you want to buy, or it can be used to make up a shortfall if you plan to pay with cash.

Pros

  • You own the car while you’re paying off your loan. This means you may be able to sell it, but you do have to confirm this with the lender.
  • You may be able to pay a smaller deposit than some finance types.
  • You may be able to make additional payments if you want to pay your loan off sooner, or pay your loan off early in full.
  • You won’t have any annual mileage restrictions, and you don’t have to hand the car back.

Things to bear in mind

  • As with any financial agreement, it’s critical that you’re sure you can make the repayments before you commit to a loan.
  • The lender may require you to repay the loan if you sell the car or it is written off.
  • Monthly payments may be higher than some other finance options, such as PCP, as you're paying off the full value of the car.

About the Author

Zara Porter

Staff Writer at Arnold Clark

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