Car Finance Explained: A Guide to HP and PCP

There are different types of finance to consider, with each working slightly differently to suit a variety of needs. 

In this guide, we will cover everything you need to know about Hire Purchase (HP) and Personal Contract Purchase (PCP) finance, to help you better understand each type of finance so that when you’re ready to buy a new or used car, you’ll know exactly what type of finance is best suited to you.

Available on new and used cars, Personal Contract Purchase is one of the most popular choices for financing a vehicle. PCP finance allows you to spread monthly payments across a fixed term, while deferring some of the vehicle costs until the end of the contract length. 

Other perks of this finance option include the flexibility of customer customisation of contracts, including the ability to tailor the 'Optional Final Payment fee' - the value your finance company will guarantee your vehicle is worth at the end of your contract – along with the deposit amount and the fixed monthly payments, the mileage limit and agreement length. 

As an example, a first deposit would be paid through one of three ways: cash payment only; a part-exchange on your old vehicle or combine both cash and part-exchange to pay the deposit. After this deposit is paid, the contract will be signed, and your fixed monthly payments will begin. 

There may be a zero deposit on some PCP agreements which appeal for some financial situations, however, this will mean that your monthly payments will be higher than if you had put down a deposit. 

A main reason the PCP finance option is a popular choice with many drivers is that you have three options to choose from when it comes to ending your agreement.

1. You can simply end the agreement once all monthly payments have been made and return the car to the lender. 

2. At the start of your agreement, an ‘Optional Final Payment’ fee will be arranged, also known sometimes as the Guaranteed Minimum Future Value (GMFV). This will confirm the final fee amount you will pay to buy the car at the end of the agreed finance term. 

3. You can part-exchange or trade your car in and start a new agreement on your next car. 

Please note: Charges may be incurred if you have gone over the agreed mileage limit or if your vehicle is damaged. It’s worth checking your contract for the details here. 

Hire Purchase (HP) is another popular finance option for many motorists, especially those with a focus on a straightforward, simple route to owning a car, rather than flexibility of contract. 

It’s a super easy option to follow. Pay an initial deposit followed by monthly payments, with interest included, and at the end of the agreement, you have the choice to own the car by paying an ‘Optional Final Payment fee’. As this ‘Optional Final Payment fee’ is usually quite low compared to the amount spent on the contract already, it’s common practice to pay this and own the car. 

The first deposit is usually at least 10% of what the car is priced at. This can either be paid in cash or as a part-exchange for an older vehicle, or both. Once this is paid, you will begin paying the monthly payments for a fixed period and at the end of the agreement, you can pay the ‘Optional Final Payment fee,’ which will give you full ownership of the vehicle. 

Although this can sound similar to PCP, a big difference is HP finance drops a larger deposit on the start of the contract, instead of having a larger lump payment at the end. It makes it a lot more likely to be able to own the car outright at the end of the contract.