The difference between HP, PCP, PCH and leasing - your car finance options explained
When buying a new vehicle, many people can find it prohibitively expensive to buy it outright simply. Even if they can afford it, many don't like the idea of paying so much for a depreciating asset. Car financing – whether through a lease deal or other financing approach - has become a hugely popular way for people to buy new car.
What are your options for car financing, and which is going to be best for you?
- Instead of paying for your whole vehicle up front, financing allows you to spread the cost
- There are many differences between HP, PCP, PCH and leasing
- The differences tend to be around how much you pay for your car and when you pay it
What is car finance?
When you're looking at car finance, it breaks down into three main options:
PCH, which means Personal Contract Hire – PCH car finance is otherwise known as leasing, where you simply pay your monthly fee for the use of the car. It is essential to a long-term rental agreement. The main differences between PCH and PCP or HP is that PCH doesn't offer you an option to buy the vehicle at the end of your contract. You choose your car, agree to the contract terms and then, at the end of your contract, give the vehicle straight back to the finance company.
PCP, which means Personal Contract Purchase – PCP is not the same as leasing. With PCP finance, a deposit is paid followed by monthly payments until the end of the contract period. When your PCP contract begins, the vehicle's Guaranteed Future Value (GFV) is determined. This is what the vehicle is expected to be worth at the end of the contract. The money you're paying is the difference between the vehicle's new value and what it's projected to be worth at the end of the contract, rather than the vehicle's complete value.
It's important to bear in mind that if anything happens to the vehicle or you decide you want to get out of the contract, you will still be liable for the vehicle's full value, even in a PCP contract. When the contract ends, you'll have three options.
- Make the car yours by paying the final balloon payment, which will be the same figure as the Guaranteed Future Value. You might be able to finance this, depending on the company you're dealing with.
- Give the car back.
- Part exchange the vehicle for a new one and to start the process again.
HP, which means Hire Purchase - Similar to PCP finance, except you're paying off the vehicle's actual value rather than its depreciation. With Hire Purchase, you usually pay your initial deposit and your monthly instalments with a PCP deal. The difference is that you're paying off the entire value of the car. As such, when the contract ends, the vehicle is yours.
What is the difference between HP and PCP?
Personal contract purchase and hire purchase agreements are similar in that a deposit is paid, followed by monthly instalments. However, the difference between them is that with a PCP contract, you pay off the vehicle's depreciation rather than its total actual value. There will often be a "balloon payment" to cover the remaining balance at the end of the contract.
Now you know the basics, let's discuss each in a little more detail.
What are the differences between PCH (leasing), PCP and HP?
The main benefits of PCH, or leasing
- Easiest option. With leasing, you don't have to worry about what to do with the vehicle when you're done with it. After your contract, you simply hand it back to the leasing company, and that's that. You won't have to worry about selling it or being stuck with an asset that has already depreciated considerably.
- Maintenance packages are often provide by car lease companies, which means you won't have to pay out of pocket for servicing and wear and tear costs.
- More affordable way to get a better quality vehicle for many people because the finance involved doesn't consider your proposed ownership of the vehicle, so you're not covering the vehicle's purchase price with your monthly payments. This means if you're looking for a newer and better-optioned vehicle, you might find it more affordable to lease it.
The downsides of PCH
- No option to buy the vehicle, whether you like it or not. You pay for its use through the contract term, and when the contract is over, you give it back. You may have the option to renegotiate your lease to keep the vehicle, but at the end of the new contract, you still won't own the vehicle you've been paying for.
- Mileage allowances and other usage restrictions encouraging a further charge if you exceed them. This can be difficult to manage when it's unpredictable how many miles you're going to drive over a certain period.
- Early termination charges if you want to terminate the lease before the terms are completed.
The benefits of PCP
- Monthly payments are usually lower with PCH than HP because you're financing the difference in value due to depreciation rather than the whole value itself.
- Option to walk away from the vehicle if you decide you don't want it after your contract ends. This means you don't have to think about selling it or replacing it.
The drawbacks of PCP
- Balloon payments if you want to buy the vehicle, which, as it's worked out as the Guaranteed Future Value, can be prohibitively expensive. This is one of the main differences between PCP and lease, as with lease there is no option to buy.
- Can't sell the vehicle if you still owe finance on it.
- Mileage allowances and usage limits can be imposed via your contract. There could be a potentially steep penalty for breaking them.
- Need to keep your vehicle taxed, insured, and pay for ongoing maintenance unless your PCP contract has a specific maintenance provision.
The benefits of HP
- Buy the vehicle outright simply through your monthly repayments. You won't have to worry about balloon payments or other charges because you'll have already paid off the car's value.
- No mileage estimations, so you can use the vehicle when and how you see fit without worrying about incurring additional charges.
The drawbacks of HP
- Higher monthly payments. As you're financing the vehicle's full value, you'll find the monthly payments are often much higher than PCP or lease deals.
- Can’t sell the car unless you have completely settled the outstanding finance.
- Ongoing costs of running the vehicle. Unless you have specific maintenance packages on your HP deal, you will have to pay out of pocket for any maintenance and repair costs.
Which of these options is best – PCP, HP or PCH?
The answer is that none of them is inherently better than the other. They're all different and appeal to different people with different priorities.
For example, if you want the least stressful usage experience possible and aren't bothered about owning the car, a lease deal is ideal for you. Similarly, if you find a vehicle and want to make sure you own it outright, you may prefer a hire purchase deal. There's no right or wrong answer, as long as you make sure you fully understand the terms of the deal you're agreeing to.
The key is to look at your circumstances, budget, and preferences, then find the deal that best suits them.
