Which type of car finance is best for you?


    Many people still assume that getting a car on finance is a one size fits all agreement. However, this is not the case. In the UK, there are two car finance agreements which tend to be the most dominant. These agreements are hire purchase car finance and PCP car finance deals. Both could be right for you but there are some clear differences between the two. Many drivers may be suited to one type of car finance over another. Let’s explore each car finance agreement in detail and weigh up the advantages and disadvantage of each.

    What is PCP car finance?

    Personal contract purchase or PCP car finance is a car finance agreement that can be more complicated than other options. However, there are many benefits to getting a car through PCP. PCP car finance is a flexible agreement that allows you to spread the cost of getting a new or used car. You only pay back part of the cost of the vehicle which can make monthly payments lower than other car finance options. Due to this, you have more flexibility at the end of the agreement. You can choose to:

    • Hand the car back to the dealer and the agreement has ended.
    • Pay the balloon payment and keep the car.
    • Use the value of the car towards a new PCP deal with a new vehicle.

    Benefits of getting a car on finance through PCP

    PCP car finance deals can suit a wide range of drivers and provides more flexibility from your car finance agreement.

    • Lower monthly payments as you usually take out a smaller loan.
    • Greater flexibility at the end of the agreement.
    • Don’t have to own the car or sell it at the end.
    • Can be suited to both good and bad credit scores.
    • Can finance new and used cars.
    • Little or no deposit needed.

    Disadvantages of PCP

    Some aspects of PCP car finance may not be suited to some drivers.

    • Many drivers choose to hand the car back to the dealer, so they are required to set an annual mileage limit at the start of the agreement. Charges can occur if you exceed this limit.
    • Additional damage charges also apply if you hand the car back with more than general ‘wear and tear’.
    • The balloon payments tend to be large so may not be suitable if you wanted to own the car.

    What is hire purchase car finance?

    Hire purchase car finance can be more straightforward. Within a hire purchase deal, you spread the full cost of your chosen car into monthly repayments. You usually have to put down a deposit first but there are many no deposit options too. You then meet the repayments until the end of the agreed term. You can then own the car at the end of the agreement once the final payment has been made. There’s no large balloon payment to pay but an option to purchase fee which is usually similar to your monthly payments.

    Advantages of hire purchase deals:

    Hire purchase deals can be one of the simplest forms of car finance and they offer a range of benefits.

    • Available on new and used cars
    • No deposit needed
    • No mileage or damage charges
    • Can own the car at the end of the agreement
    • Use the car as a part exchange on a new vehicle.
    • Settle your agreement early

    Disadvantages of hire purchase car finance:

    Hire purchase car finance could be the better option if you are looking to keep your monthly repayments low and you should also consider the following:

    • Monthly payments tend to be higher
    • May not be suitable if you want to change your car more regularly
    • Interest can be higher if you choose to spread your deal across a number of years
    • Loan is secured against the vehicle so if you fail to make repayments, the lender can take the car off you
    • Don’t own the car until final payment has been made

    PCP vs HP – which is better?

    After reviewing the above advantages and disadvantages of each, you may already know which car finance deal is right for you. If you want to benefit from lower monthly payments and have a more flexible finance deal, PCP could be the right option for you. Alternatively, if you want to purchase a car outright but pay for it in monthly payments, HP car finance can be the way to go. If you travel quite far each day, you may also be better suited to a HP agreement as it doesn’t have any mileage restrictions associated. It’s worth comparing prices for both PCP and HP deals when you’re shopping for your next vehicle.