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Hire purchase (HP) explained

Offered by? Car dealerships, car supermarkets and finance brokers

For? New and used cars, but not private sales

How hire purchase works

HP agreements are straightforward: you pay a deposit (usually at least 10% of the car’s value), and then pay off the value of the car, plus interest, in monthly instalments, over a fixed term. These usually last one to three year but can be up to five years.

At the end of the term you’ll pay a ‘transfer fee’ or ‘option fee’ to take ownership of the vehicle. It’s important to understand that you won’t own the vehicle until this payment is made – this means you can’t sell it without the lender’s permission — though this final fee is often relatively inexpensive.

Personal contract purchase or plan (PCP)

Offered by? Car dealerships, car supermarkets and finance brokers

For? Mostly new cars, some used cars, but not private sales

How personal contract purchase works

PCP is effectively a loan – but you don’t borrow the full price of the car. If you go for a PCP deal, you’ll pay a deposit (usually at least 10% of the car’s value — sometimes more) and then make a set number of monthly payments. You won’t own the car at the end of your agreement.

Your monthly payments will be based on the price of the car, the interest rate (APR) and how the car’s value is expected to drop over the course of your agreement (known as depreciation.) Depreciation is the key to understanding PCP finance. Cars will lose value as soon as you drive them off the forecourt, though some lose a lot more than others.

When you apply for a PCP finance plan, the finance company calculates a predicted minimum value for the car at the end of the agreement. This is called the ‘guaranteed minimum future value’ or GMFV. At the end of the term you have a few options: return the car with no additional fees or you can pay an optional ‘balloon payment’ if you want to own the car outright. This payment takes into account the car’s GMFV, as set out in your contract.

Personal contract hire (PCH)/car leasing

Offered by? Car dealerships, car supermarkets and finance brokers

For? New cars, used cars, but not private sales

How personal contract hire works

Personal Contract Hire (PCH) is more commonly known as car leasing and is similar to renting a car. You pay a deposit, pay an agreed monthly amount, and get use of the car for the duration of the term. You’ll also have to pay for any damage that occurs during the lease (beyond fair wear and tear).

Most car leasing agreements run for two to five years, and the deposit is normally equivalent to three to six times the monthly payment. In general, the longer the agreement, the lower the monthly payments. The key difference between PCH and PCP is that with PCH you will need to hand the car back at the end of the contract – there’s no option to buy it.

Most PCH deals are aimed at businesses. For this reason, many deals are priced excluding VAT. Before you sign up, check if an advertised price includes VAT or not. If not, you’ll need to add 20% to the monthly price to arrive at the amount you’ll actually pay.