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Differences between PCP and HP Finance Agreements

The two most common types of finance you're likely to be offered at a dealership when you're looking to buy a vehicle are PCP and HP, or personal contract purchase and hire purchase to give them their full designations.

Although they are different products, there are also a lot of similarities as they're a lot more similar to each other than they are to leases and contract hire agreements. The question isn't which is best though.

The question you need to ask before deciding to fund your vehicle purchase with one or the other is which one is the right one for you?

The Basics

Both of these finance products lend the money for you to buy the vehicle outright and take ownership of it at the end of the agreed term. The sum borrowed will be paid back through monthly payments over a period that can be anything from 12 to 60 months. In most cases interest will be added to the amount borrowed, although interest-free agreements are becoming increasingly common. One of the really good things about both forms of finance is the monthly payments are agreed at the start and do not change, which makes budgeting nice and straightforward as the payments will not change.

The Big Difference

Where these two finance products differ is at the end of the term. With an HP agreement the vehicle is yours when the last payment is made as you've paid the entire amount of money back you borrowed, plus any interest, if applicable. However, with a PCP the final payment isn't your last regular monthly payment. With a PCP a large part of the borrowed sum is deferred at the start of the agreement and only becomes payable at the end, but only if you want to pay it off and keep the car. This amount offset to the end of the agreement is referred to by several different names, which are usually the residual, a balloon payment or the guaranteed future value. The last one is the most accurate description because of the word 'guarantee.'

Guaranteed Future Value (GFV)

The size of GFV is determined by a number of criteria when a quote is raised, which are used by the lender to estimate the vehicle will be worth at the end of the agreement. The length of the agreement and the maximum amount of miles you say you're going to do during that time are the key factors in deciding how large or small the GFV will be. Although none of this sum is repaid over the term, you will be paying interest on it, and probably at a different rate to repayable portion of the agreement. You can pay the GFV off at the end and keep the vehicle, you can re-finance it, or you can simply hand the vehicle back to the finance company and walk away (as long as you haven't exceeded the mileage). If the vehicle isn't worth as much as it's GFV and you hand it back, that's the finance company's problems as they have guaranteed it.

Conclusion

A PCP will usually mean lower, more affordable monthly payments than a HP agreement on the same vehicle for same sum over the same period, which is why they are so popular. However, they are normally only for up to 48 months, whereas HP agreements are regularly over as long as 60 months. Having said that, there are now PCPs for up to five years, but they're not particularly commonplace. A five-year HP agreement may offer lower monthly payments than a three-rear PCP, but you need to think carefully about whether a longer agreement is for you. Lower monthly payments are fine, but if you want to change your car after three years of a five-year HP deal there will still be a substantial sum outstanding, which is pretty much the same as a balloon payment, except it's not guaranteed.

Essentially, the only major difference between PCP and HP is that deferred payment. Both products are available with different interest rates, and unlike contract hire or a lease, you will own the vehicle when all payments have been made. It's up to you which is the better product for your circumstances, but the best piece of advice is to be honest with yourself about how long you are really likely to want to keep the car.

23 January 2017

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