June 23, 2023

What is the difference between Hire Purchases and PCP

Are you interested in getting a new car but struggle to have the lump sum to buy it?

You have a couple of options to choose from.

Briefly, a hire purchase is very similar to a bank loan. You borrow a set amount for a vehicle and pay monthly payments, so you owe nothing at the end of the term. In comparison, a PCP is where you pay monthly payments (usually smaller than hire purchases) and you still owe money when the term finishes. Want to learn a bit more about so you can work out which one is right for you?

Hire Purchase - This is great if you are planning on having the car for a long period of time however if you decide you do not want the car anymore you can still sell it

Because you will be full owner once the term is finished, you are not limited to how many miles you do or restricted from making modifications to the car. However, the monthly payments on the loan will be considerably higher compared to a PCP loan because you do not owe anything at the end of the term.

It is important to remember that if you miss a monthly payment, you can lose the vehicle, so make sure you can afford it before taking out the policy.

Personal Contract Purchase (PCP) works differently. Whereas conventional hire purchase divides the total amount borrowed into equal monthly payments, typically over three or four years, PCP involves a series of smaller monthly payments, with a larger payment at the end of the agreement. This end payment is sometimes referred to as a balloon payment, or the minimum guaranteed future value (MGFV).

There are a few rules to follow as well such a no modifications and only certain number of miles allowed each year. That’s important because the number of miles you are likely to have covered by the end of the agreement is used to calculate the MGFV.

A PCP keeps consumers’ options open. At the end of the term, you would have the option to pay the balloon payment to own the car outright, trade in the car for a new one, or just hand the keys back with nothing else to pay.

Under a PCP you are financing a car’s depreciation rather than the whole price, so that reduces the monthly cost.

Our suggestion – don’t borrow to buy a car! Paying in cash is the cheapest option as you won’t have any interest costs to cover.

But if you must, then properly research which loan suits you better and what you can realistically afford without making yourself skint for the duration of the term.

Always aim to repay the debt, otherwise you can be stuck in a cycle of permanently “renting” a car, with no asset to show for all those payments you’ve made over the years. And should financial hardship strike, you could be trapped in a deal you can’t get out of.

Hire Purchase & Personal Contract Purchase are not part of the Quilter Financial Planning offering. We do not advise on or provide advice on Hire Purchase & Personal Contract Purchase. The information contained in this blog is for information purposes only.

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