HP, PCP, or PCH - Which is the Best Car Finance Option?

When buying a new vehicle, many people will 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. That means financing has become arguably the most popular way for people to buy new vehicles. What are your options for car financing, and which is going to be best for you?

The three main options

When you're looking at car finance, it breaks down into three simple choices:

  • Personal contract hire (PCH) - Otherwise known as leasing, where you simply pay your monthly fee for the use of the vehicle
  • Personal contract purchase (PCP) - A deposit is paid followed by monthly payments until the end of the contract period
  • Hire purchase (HP) - Similar to PCP, except you're paying off the vehicle's actual value rather than its depreciation

Now you know the basics, let's discuss each in a little more detail.

What do you need to know about PCH?

Personal contract hire, otherwise known as leasing, is essential to a long-term rental agreement. The main difference between this option and the other two is that it doesn't offer you an option to buy the vehicle at the end of your contract. You simply choose your car, agree to your contract terms, and then at the end of your contract, you can give the vehicle straight back to the finance company. It's as simple as that.

The main benefits of PCH

The first benefit to know is that it's usually considered the easiest option, as 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. Another key benefit is that most lease companies will offer some sort of maintenance package with their vehicles, which means you won't have to pay out of pocket for servicing and wear and tear costs. Leasing is often a 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

The negative of leasing is that you have 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. Something else to consider is that PCH deals often have 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. Many also don't like the idea of paying for a vehicle and then being restricted on its use. As with a lease on anything else, like a piece of electronic equipment or property, there may be considerable charges if you want to terminate the lease before the terms are completed.

What do you need to know about PCP and HP?

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.

How does PCP work?

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. So the money you're paying is basically 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 main options. The first is to 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. The second is to give the car back. The third is to part exchange the vehicle for a new one and to start the process again.

The benefits of PCP

The main benefit is that the monthly payments are usually lower than the equivalent vehicle bought via HP because you're financing the difference in value due to depreciation rather than the whole value itself. Another benefit is you have the clear 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

If you want to buy the vehicle, you'll have to pay the balloon payment, which, as it's worked out as the Guaranteed Future Value, can be prohibitively expensive. You also can't sell the vehicle if you still owe finance on it. As with lease deals, you may find mileage allowances and usage limits imposed via your contract. There could be a potentially steep penalty for breaking them. You'll also have to keep your vehicle taxed, insured, and pay for ongoing maintenance unless your PCP contract has a specific maintenance provision.

How does HP work?

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.

The benefits of HP

The first benefit is that you'll be able to 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. You also won't need to worry about mileage estimations, so you can use the vehicle when and how you see fit without worrying about incurring additional charges.

The drawbacks of HP

As you're financing the vehicle's full value, you'll find the monthly payments are often much higher than PCP or lease deals. You also won't be able to sell the car unless you have completely settled the outstanding finance. Something else to think about is the 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?

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.