The Two Main Types Of Car Finance Explained

There are two main types of car finance offered by lenders: PCP (personal contract purchase) and HP (hire purchase). What are the differences? And which is the best option for you? This brief guide explains.

Both PCP and HP have a few similarities. They both require you to put down an initial deposit. You then pay off the remainder of the cost of the car in monthly instalments with interest fees attached. However, there are a few differences when it comes to the size of instalments, your mileage allowance and your ownership rights.

HP finance is the most traditional option. After paying an initial deposit, you typically pay off the cost of the vehicle in equally-sized monthly instalments. Once you’ve paid all the instalments, you automatically own the vehicle. You can sometimes return a hire purchase vehicle, but usually only after paying at least 50% of the value of the car.

PCP finance is a modern option that is becoming more common. You pay a deposit and pay the vehicle off in instalments. These instalments are typically smaller with the exception of the final instalment which is much larger (known as a balloon payment). Paying the balloon payment allows you to own the vehicle. Alternatively, you can put a deposit on a new car using the equity from your current finance or return the vehicle. These finance schemes typically come with mileage limits, plus you may have to pay for any repairs if you choose to return the vehicle. 

The following infographic explains the differences in greater detail and could help you to work out which is the better option for you.