If you’re thinking of buying a car, then you’ll probably have heard the terms PCP and HP being bandied about. While it’s probably obvious that they’re both types of finance – i.e., alternative methods of buying the car without paying the overall list price in one large, outright chunk – it might not be clear about the benefits and drawbacks of PCP and HP. So what is PCP? What is HP? And which one is best for you?
What is it?
PCP stands for Personal Contract Purchase, although it is also sometimes referred to as a Personal Contract Plan.
How does it work?
Hugely popular with car buyers in recent years, this is a form of Hire Purchase (see below) that runs over a variable contract period, but the most common one is three years. With PCP, you pay a deposit of your choice, which can be anything between nothing and up to (typically) 35 per cent of the value of the vehicle’s list price plus any optional extras chosen. You then choose the length of time you wish to keep the car, plus how many kilometres per annum you’re going to cover and, from this the car company’s financial department works out what the vehicle will be worth at the end of the agreement; this is called the Guaranteed Minimum Future Value (GMFV) and it’s an important figure – so, for example, if you say you want a car over three years and you’ll do 10,000km per year, the GMFV will be pegged at what financial experts predict that particular model will be worth when it’s three years old with 30,000km on the clock. Optional extras fitted can positively affect the GMFV, hence why they’re taken into account when calculating the PCP.
What you finance is the depreciation between the new price of the car and the GMFV. As an easy-to-understand example, if the car is €30,000 and you pay a €10,000 deposit, and the car is predicted to have a GMFV of €10,000 after three years/30,000km, then you’re financing the remaining €10,000 over 36 months, plus whatever annual percentage of interest is on the loan (e.g. 2.9 per cent APR). It’s essentially a form of hiring the car, but you’re not financing the full price of the vehicle – which is what makes it so popular with car buyers. At the end of the agreement, you have three choices: you can either hand the vehicle back at no further cost to yourself and walk away, in effect having paid only the cost of depreciation on the car over three years (in the form of a deposit plus monthly payments with interest); you can pay the GMFV figure, now known as an ‘Optional Final Payment’, and you will then own the car outright, having paid its full purchase price plus interest as a result; or you can use any equity in the vehicle to use it as a deposit payment on a new car and a fresh PCP – this is because the car could be worth more than the GMFV and so you will have a small ‘equity’ figure as a result.
PCPs are common because, as you’re not financing the full value of the car, the monthly payments are relatively low in terms of loan agreements. It also makes expensive, premium vehicles more accessible – because they have higher residual values, you’re paying less for the depreciation. The flexibility of the plan also means you’ve got several options when the agreement is up, and buyers like this because it means they don’t have to make a decision at the start of the PCP as to what, ultimately, they’re going to do with the car at the end of the PCP.
There are strict limits on the annual mileage and if you exceed it during the agreement, then you may pay a penalty fee that is based on a cents-per-kilometre basis. The car also needs to be in tip-top condition when you hand it back, with no kerbing to the alloys, scratches to the bodywork or excessive wear and tear or staining to the interior, otherwise you face further costs. And, unless you decide to make the sizeable Optional Final Payment, then despite the large amount of money you outlay in deposit and PCM payments, you’ll never actually officially own the car in question. Additionally, if you only get the GMFV for the car at the end of the agreement and you want to go on to do another PCP on a new car, you will have nothing of monetary value from the first deal to place down on the second PCP as a deposit.
What is it?
HP stands for Hire Purchase.
How does it work?
This is an older system of buying a car without paying the full price in a lump sum and it’s basically a good, old-fashioned car loan – of a sort. Like PCP, you can pay a deposit of your choosing (this time, it’s not normally limited to a percentage of a vehicle’s value and you can choose to pay no deposit at all on some deals) and then you pay monthly finance on the rest of the car’s value, plus interest (set by the amount of APR). It’s like going to a third-party finance lender, such as a bank, and asking for a loan of, say, €25,000 to buy a car, and then paying that €25,000 plus interest back over a period of time; it’s just that the car manufacturers will provide HP themselves, through the financial arms of their business. Like PCPs, HP agreements can run over a variable number of years, so you can choose to spread your payments over anything between one and seven years – although different time limitations might apply with different car manufacturers.
There are no mileage limits on HP agreements, because it makes no difference to the car finance company how much the vehicle will be worth at the end of the loan – there’s no GMFV to be calculated. This is because you will own the vehicle when the agreement ends; you’ll have paid its full price plus some interest and the car will be yours. It will still retain residual value, too, so if the vehicle is worth, for example, €10,000 by the time you’ve paid off its full new price, then you can use the majority of that €10,000 as a trade-in on a new vehicle – or even as a deposit for another finance deal.
The monthly payments will be considerably higher than on PCP because, minus the deposit, you’re then financing the entire outstanding value of the vehicle across the term of the agreement. There are also less choices at the end of an HP agreement, because in essence you’re just buying a car in its entirety – it’s simply that you’re spreading out the payment for the car over a number of years. The APR rates offered by the manufacturers’ financial services will normally not be as competitive as the APR rates you’d get from a bank or other lender, although this can change, especially around new registration periods when manufacturers offer multiple incentives on HP (and PCP, too) in order to encourage new car sales.
Which should I choose?
The simplest way to put it is this: do you want to legally own the vehicle at the end of the agreement and can you afford higher monthly payments, or are you happy to go on changing your car every few years for the newest and latest models, and you wish to keep your monthly payments low? If the former, you want to use HP, but be aware you’ll be paying more per month than with PCP. If the latter, PCP is a flexible and cost-efficient way to go – however, make sure you adhere to all the rules of the agreement, including mileage rates and vehicle condition upon return, to get the best from the finance arrangement.
Carzone - 12-Nov-2018