When buying a new car on finance, there are two main options to choose from - Hire Purchase (HP) and Personal Contract Purchase (PCP). Each comes with their own pros and cons, so which one to opt for will generally depend on your financial and personal situation.
One thing to remember with HP and PCP is that they’re both secured loans. This means that the car acts as collateral against the loan. The downside to a secured loan is that if you’re unable to keep to your repayments, you’re at risk of losing your collateral. But one of the advantages is that secured loans generally have lower interest rates than unsecured loans, and can be easier for people with bad credit to obtain.
Hire Purchase (HP) - With a hire purchase agreement, you’ll typically need to pay a deposit of about 10% of the cost of the car, and then make fixed monthly payments over the agreed time period. Once you’ve made the final payment, you’ll then own the vehicle outright. Hire purchase arrangements can be incredibly competitive for new cars, so this is a popular option if you’re looking to purchase a new vehicle.
Personal Contract Purchase (PCP) - A personal contract purchase tends to come with lower monthly payments than HP, but they are fairly similar overall. You’ll generally need to make an initial deposit, and then monthly instalments moving forward. The main difference is that you won’t be covering the cost of the car, but the depreciation instead. So at the end of the term, you can choose to make a balloon payment to pay for the car, trade in the car for a new vehicle, or simply hand back the keys and walk away.