Neither. The two are different. To simplify the choice we will split them into two parts, PCP and HP.
PCP or Personal Contract Plan
Imagine a cake, split into roughly three parts. The first piece, is your deposit, which you need to pay up front. Schemes vary, but usually this is between 10% and 35% of the price of the car. You need to pay this at the beginning as a down payment on the car. The third piece is what the car is expected to be worth at the end of the agreement. It is usually called a GFV (Guaranteed Future Value), and it is the amount that the lender or manufacturer will guarantee the vehicle is worth at the end of the agreement, usually about 30% of the original value of the car depending on your declared mileage usage. After piece one, your deposit, and piece three, the GFV, have been removed, you are left with piece two, around 40% of the value of the car. This is the bit you finance.
The idea is that rather than financing the whole car, paying a large payment, and owning the car at the end, what you do is pay just the depreciation of the vehicle for the time you own it. For example, if you purchased a new £10,000 car over 3 years with no deposit, your payment would be around £320 per month. If you purchased the same car on a PCP, with a 20% deposit, and a 30% GFV, you could expect a payment of more like £180 per month.
The positives are;
- You have a much lower monthly outgoing
- Manufacturers who are keen to sell cars often offer discounts to encourage you to sign up, and these can be very good deals
- Aside from the cost of the car, there are often manufacturer incentives such as free fuel or insurance
- Your GFV is usually lower than the real value, so often you will have effectively saved a deposit for your next car as you are not obliged to hand it back, you are only obliged to pay off the GFV, you can always sell it instead for more than the GFV, and you can usually sell it back to any dealer, including the one you bought it from, so long as the value of the car exceeds the GFV
The Negatives are;
- You do not own the car at the end, and if you want to keep it a large final payment will be required equal to the GFV
- You have to commit to an annual mileage up front. Guess too high and you are paying for miles you haven’t used, guess too low and you will have to pay an excess mileage charge usually around 10p per mile upwards. This can be a nasty surprise if during the term your circumstances change and you need to do many more miles than estimated
- If you want to keep the car, but can’t make the final payment, you will have no choice but to return the vehicle, often for much less than it is really worth, especially if you can’t sell it quickly
HP or Hire Purchase (sometimes referred to as Conditional Sale Agreements)
Hire Purchase, or HP, is a much simpler product. You buy the car, pay a deposit which could be nothing, but usually is 5-10% of the value of the car, and you borrow the rest from a lender. There are far fewer rules to follow and hoops to jump through, and you will own the car at the end of the agreement. There are not usually any mileage limitations, and even if there are, no one will usually even check unless you stop paying the finance or Voluntary Terminate the car. The monthly payment is a bit higher, but often the deposits are lower. Also, HP is usually available for a longer term. This means that comparing a 3 year PCP and HP together makes the PCP look like a very affordable payment. But if you consider that you don’t own the car at the end of a PCP, but you do with HP, you could opt for a 5 year HP agreement and the payment would not be that much different as you are paying the balance off over a longer period of time, thus reducing the monthly payment.
The positives are;
- Usually lower deposits, but not always
- No mileage restrictions (usually)
- You own the vehicle at the end of the term
- Simpler and easier to understand
- No penalties at the end of the term in most cases
The negatives are;
- Sometimes the deals on HP are not as attractive on new cars as the PCP offering
- You may have a higher monthly outgoing, or longer term of payments
- Fees, sometimes lenders impose higher first and last payments that can be more expensive than PCP deals
If you want to buy a new car, you know you will want to change it in three years, you are sure your mileage use estimate will be accurate, and you are looking for a low monthly payment, a PCP can be a great deal. It can provide you with some excellent incentives to buy a car, and give you a low monthly running cost for the time you have it. But there are many clauses to watch out for, in particular mileage penalties if you over run, and the lack of options to keep the car at the end of the term. There is nothing worse than having to part with your pride and joy after three years of paying for it because you can’t lay your hands on the £4000 required to keep it.
If you need to be flexible, are buying a used vehicle, want to own the car when you have finished paying for it, or intend to keep it when the agreement finishes, then HP is usually a better option. However, the payments can be a bit higher, and sometimes the initial deal not so good, but often this is mitigated by the flexibility HP agreements provide if your circumstances change.