The Financial Conduct Authority (FCA) announced on 11 January 2024 that a review will be conducted in the vehicle finance market regarding Discretionary Commissions. We want to inform our customers that Anglo Scottish Asset Finance acts as a broker, not a lender, and if you believe you have been impacted by this issue, please contact your car finance lender. For further information, please click here

The Financial Conduct Authority (FCA) announced on 11 January 2024 that a review will be conducted

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PCP vs. Hire purchase, which finance option is right for you?

26th January 2022

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Personal Contract Purchase (PCP) and Hire Purchase (HP) agreements are two of the most common types of car finance for private individuals, but do you know which option is right for you?

We look at the pros and cons of each option so that you can make a fully informed decision.

PCP vs. Hire purchase

What is Personal Contract Purchase (PCP)?

PCP is a widely used finance agreement that allows you to purchase a car by spreading the payments over a long period, typically two or five years.

When entering a PCP agreement, you would pay a deposit on the car you want and make monthly repayments until the end of the term. When the term ends, you will have a choice: you can make a lump sum payment – known as a balloon payment – to purchase the vehicle outright. Or use any equity left in the deal as a deposit on a new vehicle, via a new PCP deal. Or you could hand the car back and walk away without making any further payments.

Benefits of PCP

Typically, repayments on PCP agreements tend to be lower than those of Hire Purchase agreements, this is because you are not aiming to repay the whole value of the car within the agreed term, instead, there will be a balloon payment at the end of the agreement. Together with the monthly payments, the balloon payment would equal the full value of the car.

PCP is also a great option if you plan to replace or upgrade your vehicle regularly, as you will not be tied to your vehicle for longer than the agreed term.

Additionally, you will be protected to a degree from depreciation (if the value of the vehicle declines quicker than expected during the loan term), rather than paying more than what the car is worth, you can simply be handed back to the finance provider without losing money.

Disadvantages of PCP

One of the main disadvantages of a PCP agreement is that there is no guarantee you will become the outright owner of the car at the end of the term. If you can’t afford to make the balloon payment, you will have to hand the car back. Or it is possible to arrange a “balloon finance” agreement with a finance provider that would allow you to spread the costs of the balloon figure over a longer period, allowing you to keep the car and own it at the end of the new agreement.

With a PCP agreement, there are also likely to be limits on annual mileage. These limits should be discussed at the beginning of your agreement and will affect the amount of your repayments. If you exceed these limits, you will be charged extra, so it’s best not to estimate low when you start your agreement.

You will also be required to keep your car in good condition and pay to fix any issues such as damaged or scratched bodywork right before you hand the car back. If this is not done, you may face financial penalties.

What is Hire Purchase?

Hire purchase is a popular finance agreement where you would pay an initial deposit (which may include the trade-in value of your current vehicle) and then make monthly payments for a fixed period – typically over 2 to 5 years – at the end of which you become the legal owner of the car (there may be a small “Transfer of ownership” charge to switch the car legally to your name).  

The more deposit you put down on a hire-purchase deal, the lower your monthly payments will be and vice-versa.

Benefits of Hire Purchase

Hire-purchase agreements allows you to spread the cost of a new vehicle evenly, without having to find all the amount upfront.

One of the main benefits of Hire Purchase agreements is the absence of a balloon payment. Unlike a PCP agreement, once you come to the end of the agreement term, you will have paid off the full value of the car and it will legally be yours (a small transfer fee may apply). 

Hire purchase agreements also benefit from no annual mileage restrictions in the way that PCP agreements do. As you own the vehicle by the end of the agreed term, there is no need to calculate a residual value or pay for mileage.

Hire Purchase agreements may also be a better option for people who may have struggled to get credit in the past, this is because the risk for a dealer or manufacturer is offering hire purchase is lessened to some extent by the fact that they can repossess the vehicle if the borrower can no longer make their monthly repayments, this is because the loan is secured against the car.

Disadvantages of Hire Purchase

As with all finance agreements, there is a risk that if your circumstances change and you are unable to maintain repayments, then your vehicle may be repossessed, leaving you without a vehicle. If you are ever concerned about making your repayments, it is best to speak to your finance provider asap to discuss your options.

There is also a greater risk of losing money through the depreciation of the vehicle’s value with hire purchase than with PCP: if the vehicle’s value depreciates faster than expected, you the customer, would still be required to continue making the pre-agreed monthly payments and take ownership of the car. With PCP, taking ownership of the car at the end of the loan term is optional.

Summary – PCP vs. Hire purchase

Both Personal Contract Purchase (PCP) and Hire Purchase (HP) agreements can be a great way to finance a vehicle that you would have otherwise been unable to buy outright. Both options are tried and tested, and the most suitable option for you will be based very much on your circumstances and your future requirements.

As with all types of loans, there is some level of risk with both PCP and Hire Purchase agreements, however, when you use a brokerage service such as that offered from Anglo Scottish, you can be sure that you’re getting the very best options and because we are regulated by the Financial Conduct Authority, you can be assured that we will always be working with your best interests at heart.

Contact a member of our team today if you would like to discuss your options.

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