PCP

What is it?

PCP – short for Personal Contract Purchase, also occasionally referred to as a Personal Contract Plan.

How does it operate?

Experiencing a surge in popularity among car buyers in recent times, PCP operates as a variant of Hire Purchase (outlined below), spanning a fixed contract duration, commonly three years. With PCP, you initiate with a deposit of your choosing, ranging from nothing up to (typically) 35 percent of the vehicle’s list price, including any optional extras selected. Subsequently, you determine the duration of ownership and annual mileage, from which the financial division of the car company calculates the vehicle’s projected minimum value at the contract’s conclusion; termed the Guaranteed Minimum Future Value (GMFV), this figure holds significance. For instance, if you opt for a three-year period with an annual mileage of 10,000 km, the GMFV aligns with financial projections of the model’s worth when it reaches three years with 30,000 km. The inclusion of optional extras can positively influence the GMFV, hence their consideration in PCP calculations. It’s important to note that your vehicle’s valuation at that time will be conducted by the salesperson. Should there be a settlement or outstanding GMFV on the vehicle, it will be offset from the trade-in assessment, with any remaining equity carrying over to your subsequent transaction.

Upon contract expiration, you possess three alternatives:

  • Return the vehicle without incurring additional costs and walk away.
  • Settle the GMFV amount to clear the loan, or refinance it in a new agreement to retain ownership of the car.
  • Trade in your vehicle; the dealer evaluates it as usual, with any equity (the variance between the assessment and GMFV) transferring to the next new vehicle.

HP

What is it?

HP – short for Hire Purchase.

How does it operate?

This method entails purchasing a car without upfront payment of the entire sum, functioning akin to a conventional car loan. Similar to PCP, you can provide a deposit of your preference (which isn’t typically restricted to a percentage of the vehicle’s value, and in some deals, no deposit is required), followed by monthly finance payments covering the remaining value of the car, plus interest (determined by the APR rate). It mirrors the process of seeking a loan from a third-party finance provider, such as a bank, to finance a car purchase, repaying the principal amount plus interest over a defined period; however, in this scenario, car manufacturers offer HP through their financial subsidiaries. HP agreements, like PCPs, can extend over variable durations, enabling you to distribute payments across one to five years, although time constraints may vary among different dealerships.

Which option should I select?

The decision boils down to this: do you desire full ownership of the vehicle at the contract’s conclusion, and can you manage higher monthly payments? Alternatively, are you content with regularly upgrading to newer models every few years, while keeping monthly payments minimal? Opt for HP if the former aligns with your preferences, albeit with the awareness of higher monthly costs compared to PCP. If the latter resonates with you, PCP provides a flexible and cost-effective route – ensuring compliance with all agreement terms, including mileage limitations and vehicle condition upon return, to maximise the benefits of the financing arrangement.