Hire purchase vs personal contract purchase

It can’t have escaped your attention that the cost of motoring has risen in line with other expenses over the last couple of years, and buying a car outright is, for many, a lump sum too far. 

However, bringing a new set of wheels into your life doesn’t necessarily mean denting your bank balance beyond repair; in fact, the existence of car finance agreements brings into reach vehicles that would otherwise be largely unattainable. 

This is why so many new and used car retailers offer flexible finance options, to spread the cost, and keep your next car affordable.   

How does car finance work? 

Car finance is, essentially, a loan to cover the cost of your new vehicle, although generally, you will put down a deposit first. The repayments are then divided between the number of months in the agreed term, and what happens at the end of your monthly repayments will depend on the type of agreement you go for. 

You will usually get to choose between a Personal Contract Purchase and a Hire Purchase, and next, we’ll explain the differences between the two. 

Personal Contract Purchase explained 

As a popular option, particularly in the new car market, Personal Contract Purchase is attractive due to its cheaper monthly repayments, which can open up newer, more expensive models for ownership. One of the main caveats of this is that you stick to a pre-agreed mileage limit, which, if you’re a frequent traveller, is something to bear in mind. 

At the end of a PCP agreement, you have several options; to hand the car back with nothing to pay (providing you’ve kept it in good condition and within the mileage limit), to keep it and pay a final settlement fee (known as a balloon payment), or exchange it for your next car. 

Hire Purchase explained 

The repayments on a Hire Purchase agreement tend to be higher than those on PCP, but there are no restrictive mileage limits to consider. You will also own the car at the end of the term, leaving you with an asset on your drive. Hire Purchase is particularly popular in the used car market, as a way to own a used car without paying out a large amount of money upfront. 

How to decide which finance type is best for you 

The way you approach car ownership will be a big deciding factor when you’re working out what type of car finance to choose. If you regularly upgrade, PCP will be a good option, but if long-term ownership is your goal, you’ll be better suited to HP. As we’ve mentioned, your annual mileage will also need to be taken into consideration, as this could make your repayments higher on a PCP agreement, and restrict how much you hit the road.