Forza Finance | 06 August 2020

PCP, HP or Lease Purchase? A Complete Guide

Have you ever looked at the finance options available to you but was unsure about the differences? Here we’ve put together answers for the most common questions that we get asked about the three main types of finance options. Hopefully, this guide will point you in the right direction to decide which is best for you. PCP vs HP vs LP explained:

Buying a new vehicle can be an exciting time, whether it’s a brand new sports car or a motorhome for those summer getaways. Choosing the right type of finance for your vehicle can be tricky. As with any larger purchase, it is important to ensure you choose the right payment solution.

So what is the difference between them all?

We’ll explain each finance option in an easy-to-understand comprehensive guide including the benefits and the important considerations of Lease Purchase (LP) vs Hire Purchase (HP) vs Personal Contract Purchase (PCP).

Lease Purchase (LP)

If your end goal is to lease a vehicle for a set time period and you have no intention of purchasing it at the end, then Lease Purchase could be the best option for you. With this contract type, you will essentially lease the car for a fixed period of time, paying off monthly instalments. Once your contract ends, the amount that you have not yet paid off is deferred to a final lump sum (balloon payment) in which, on payment, you will be able to own the vehicle in full. 

The Pros

  • You’ll have peace of mind that you have set monthly instalments and this won’t fluctuate.
  • You won’t need to think about how you will sell your vehicle once your contract ends and how much you are likely to be able to get for this.
  • A Lease Purchase contract will also help with any unforeseen issues that may need fixing as these types of fees are normally factored into the price.
  • This type of contract is great if you do not have the money to purchase the vehicle outright as Lease Purchase monthly instalments are usually a lot more cost effective.
  • This type of contract also gives you the ability to hire a vehicle that otherwise could be out of your price range to buy outright.

Important to Consider

  • Before signing this contract, you’ll need to guesstimate how many miles you will do in the time that you lease the car. Try and inflate this figure to avoid extra costs when it comes to giving your vehicle back.
  • After signing this contract, you will be expected to pay the exact amount agreed each month. Ensure that you are able to do this.

Hire Purchase (HP)

A Hire Purchase Finance contract works in a similar way to Lease Purchase, however the key difference here is the end goal; you will be paying towards owning the car outright. With this type of finance, there are two elements which you will need to pay. Firstly an initial deposit is usually agreed. Secondly, there will be monthly instalments which eventually add up to the full value of the car or vehicle.

The Pros

  • As the payments will be spread across 3-5 years, you don’t need to worry about having a large amount of money in your account when you first take it out.
  • Because you are not ‘leasing’ the vehicle like you are with a PCP contract and you own the vehicle, you don’t have to worry about excess mileage charges.
  • Once you’ve completed the full length of the contact (given you have no missed monthly payments), you are the sole owner of the vehicle and it is now your asset.

Important to Consider

  • Because you are paying off the entire value of your vehicle, the monthly instalments in this type of contract are significantly higher. Therefore, it’s worth you considering your end goal and whether you have the budget each month for a HP contract.
  • If you decide that you would like to sell the vehicle at any time, you will still be required to settle the remaining balance. This may still be a considerable amount that you may struggle to sell a used car for.
  • Before all of your instalments have been paid, you will still not own the car at this point. Therefore you will still be required to pay for upkeep and maintenance such as yearly servicing.

Personal Contract Purchase (PCP)

With a PCP finance agreement, you will usually pay a deposit and have to make monthly payments; very similar to a Lease Purchase contract. The key difference between PCP compared to the other two finance options above is that, instead of paying off the value of the car, you will be contributing towards the depreciation of the value. Once your contract ends, you can simply return the car and there are no more fees to pay. However, there is the option of purchasing the car by paying the final balloon payment. 

So how does this work?

At the beginning of a PCP finance contract, a Guaranteed Future Value (GFV) figure will be determined for the vehicle. This is where the provider will tell you what they expect the vehicle to be worth when the contract ends.

You will then pay off the difference between what the car is worth when you take out the contract initially and when the contract comes to an end. Interest is also added on top of this. This is then to be paid each month spread out over the period you have agreed for your contract (these are usually 3 or 4 years for PCP). 

Once your contract is coming to an end, you can then either keep the car by paying a large balloon payment, give the car back and there will be nothing more to pay or part exchange the vehicle for a different one and pay your remaining balance.

The Pros

  • As you are paying the depreciation value of the vehicle, this is lower than the full value. This means you will ultimately be paying cheaper monthly instalments then if you were to purchase the vehicle outright.
  • If at the end of your contract, you decide that you no longer want to keep the vehicle, you are able to give it back – no questions asked.
  • If you are someone who loves to have a new car every few years, PCP could be a great option for you. Once you want to change your car, you don’t need to try and sell it. You can go to a dealership and work out if you have positive or negative equity on the vehicle. If positive, you can use this to put down a deposit on another car.

Important To Consider

  • You won’t be able to keep the vehicle at the end of this contract unless you pay a substantial balloon payment – most people who take out this finance contract don’t end up doing this.
  • Should you have an accident during your PCP contract, you will be liable for any repairs as you are essentially still ‘leasing’ the vehicle.
  • As with a Lease Purchase contract, you’ll be required to estimate the amount of mileage you expect to cover. It is good to inflate this figure slightly to avoid any excess mileage charges.
  • If you would like to sell the vehicle, you’ll need to first settle the final payment.
  • When ‘leasing’ the vehicle, you should keep it as best maintained as possible to maintain its value. This helps to decrease the final balloon payment at the end or keep it as close as possible to what was originally agreed.

So, there we have it. The three main types of finance solutions that people choose to take out on a vehicle or asset. Hopefully, this guide has helped you to decide which is best for you.

If you’re raring to get driving your new vehicle, you can use our online finance calculator for a quick, free quote. Alternatively, our expert team is always available to chat through how we compare deals from a select panel of lenders to get you the best price.

 

Header image credit: https://unsplash.com/photos/red-sports-car-tmAynVA_ihE