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PCP or HP: which car loan should I go for?Back

Taking out a car loan to buy a new or used car is a good idea if you simply don’t have the budget to buy a car outright and need to spread out your payments over a fixed term.

There are many different types of loan available to suit a variety of circumstances and lifestyles, meaning you can find a great motor at a price that suits your budget.

The main two loans available to car buyers are Hire Purchase (HP) and Personal Contract Purchase (PCP). Take a look at the Trusted Dealers guide below to find out which is the loan best suited to your needs.

What is Hire Purchase?

Hire Purchase involves usually paying a deposit upfront then repaying the remainder of what you have borrowed in equal monthly installments over a set period of time. At the end of the final instalment, you will own the car.

What is Personal Contract Purchase?

Personal Contract Purchase is slightly more complicated. You usually pay a deposit (like HP), you will then agree to pay a series of repayments over a set amount of time, usually around 3 years. The car will have a Guaranteed Future Value (GFV) which is set for when the loan agreement ends, which you’ll then need to pay if you wish to own the car entirely. Because of the end payment, the monthly repayments using PCP are usually lower than with HP, and at the end of the agreement, you will have three choices. You can either hand the car back, buy the car based on its GFV or you can sign up for a new car.

Are there any benefits to using PCP as opposed to HP?

The benefit of using PCP is that the expected GFV might end up being higher than predicted, in which case, the dealer will loan you the difference to put towards a deposit for a new car. Or, if the GFV is lower, you won’t receive anything, but you won’t have to compensate for the short fall either.

Which loan should I go for?

Deciding which loan is better is the tricky part and your decision very much lends itself to the type of lifestyle you like to lead. If you like to change your car frequently, then PCP is probably more suited to you, but if you intend to keep your chosen car for a number of years then HP might work out a cheaper deal for you.

Important things to remember before you make your decision

One of the main things to do before you make a decision on either type of loan is to compare the different quotes between the different loan types before you sign on the dotted line. Look at the interest you’ll pay (APR) and the total cost of the loan too. Its also worth comparing the loans which dealers are offering with the type of loans you can obtain from the bank, to make sure you’re getting the best deal. You then have the added benefit of asking the dealer to match a rival’s loan offer.


Posted by Leana Kell on 14/11/2011