Hire Purchase (HP)
With HP you will normally put down an initial deposit and then by monthly instalments, pay a fixed amount until you pay the full value of the car, which you own at the end.
- You take full ownership of the car after the final payment.
- There are no conditions on annual mileage as with PCP
- You are driving a new car that you have not bought outright.
- Because you are buying the car over an agreed period, your monthly payments may be may be higher than other finance options.
- You must clear the finance on the car prior to selling it on.
Personal Contract Purchase (PCP)
Similar to a Hire Purchase agreement in that with a Personal Contract Purchase (PCP) you will usually pay an initial deposit, followed by monthly instalments.
The big difference with PCP is that those monthly instalments are only paying off the depreciation of your car and not the full value of the car.
Key to entering a PCP contract is the term Guaranteed Future Value, (GFV). This is estimated at the time of taking out the contract and is the car’s expected value at the end of your three or four year contract.
So, effectively you are borrowing money to pay for the depreciation of your car, the difference between what its value is on the day you take the keys and what it will be worth at the end of your contract.
With PCP the monthly payments tend to be low and very attractive. You must remember that the agreed GFV must be paid by you at the end if you want to buy the car.
Three options are available to you at the end of your PCP:
- Pay the GFV amount, referred to as a ‘Balloon Payment’ and own the car.
- Return the car to your lender and as the GFV has been agreed, your debt is settled.
- Use whatever equity above the GFV as part exchange for a new car
- Low monthly payments compared to a Hire Purchase agreement
- At the end of the contract when all payments are made, you can return the car and go elsewhere for your next car.
- PCP allows you drive a new car every three years without concerns on warranty issues or trade-in values.
- Any residual above the Guaranteed Future Value can be used as a deposit on your next car.
Things to bear in mind
- You need to budget for that Guaranteed Future Value, (GFV), should you want to buy the car at then end of the term.
- Be mindful of the agreed approximate mileage, as exceeding it can cost. The mileage is generally calculated in bands of 10k to 20k, 20k to 30k etc., so without being forensic, calculate your annual mileage as accurately as possible.
- Your car should carry normal wear and tear.
Settling PCP early
It is possible to settle your PCP agreement early, but remember you are paying off the devaluation of you car. Companies will therefore ask you to settle the difference between your car’s value right now and what is outstanding, probably resulting in negative equity. Also check for early repayment charges in your contract.
Do what suits
Where your personal finances are dependable and future reliable, the option of PCP will allow you get into a new car every three years, without warranty or trade-in worries, both with low monthly payments. The GFV of your car withstands any fall in value by market fluctuation.
If you wish to own your car at the end of making your monthly payments, without that Balloon Payment, then Hire Purchase will tick this box.
By Tony Toner, BeepBeep.ie Motoring Correspondent.