Finance is something that a large number of people use in the UK, but a staggering number of people either don’t understand at all, or have only the most basic idea. Simply put – as with most things – picking which option is right for you comes down to understanding the nuances so that you can make a properly educated decision.
Now most of you will have heard the terms ‘HP’ and ‘PCP’. Scary jargon that the salesman you’re talking to understands, but you don’t. Sound familiar? Well, allow me to help you through this foggy topic, by explaining both options and highlighting the positives and negatives; although making the final decision will be yours.
It’s worth noting here for completeness that when considering finance options, you could also make use of various types of personal finance like a Loan or a Credit Card. However going into these is beyond the scope of my aim here today, but it’s definitely worth understanding the full array of options available.
We will start with the newer options of the two, and the most widely used (these days anyway), PCP.
PCP – What does it stand for?
Jargon Buster: PCP stands for ‘Personal Contract Purchase’ and is the new ‘flexible’ way of financing a car
The basic concept of PCP is that you put down a deposit, make monthly payments for a set amount of time, and then (and this is the complicated part) make a ‘Balloon payment’ at the end (or hand the vehicle back). Essentially the balloon will be between 30-60% of the purchase price (although it can occasionally be more or less) and is specially calculated based on various parameters that you select – mileage, term, assumed condition etc – to represent the assumed value of the car at the point where your monthly payments end and the Balloon becomes due. The Balloon’s technical name is GMFV or Guaranteed Minimum Future Value – which makes sense now considering the above doesn’t it?
Jargon Buster: Guaranteed Minimum Future Value is the amount of money that the finance company you are dealing with has assumed the car will be worth when your contract is fulfilled
The PCP concept revolves around the deposit requirements and monthly payments being lower than HP (see later) by utilising this lump sum at the end. This makes all of the figures involved smaller, which many people see as a positive thing – despite the fact that it is a somewhat artificial reduction. These lower figures coupled with the option to just hand the car back at the end of the contract (rather than go to the effort of selling privately or trade in elsewhere) means that it facilitates our tendency to want to change our cars regularly, all comparatively easily.
HP – I want to pay in monthly instalments
Jargon Buster: HP stands for Hire Purchase
The other common option available is called HP or ‘Hire Purchase’. What you need to consider is this; you put down a deposit on the car you want, and you make monthly payments that pay off the remaining balance outstanding (plus interest where applicable), over your selected term.
The monthly payments you make (and deposit you put down initially) will be larger when compared to PCP (assuming the same purchase price and same length of term). You also have no obvious option to hand the car back, you just keep paying it until you own the car. However, this simplicity is attractive to some people; and is a major benefit of HP.
Jargon Buster: ‘Negative Equity’ is the term used to describe the borrower owing more money to the finance company than the car is worth at any given time.
So how do you pick one over the other? Simply ask yourself the following questions:
- Do you want the certainty of owning the car in full at the end of your contract?
- Would you rather have higher monthly payments, and a potentially longer required term to ensure this?
- Do you want a simple, 1+1=2 style finance contract?
- Do you have a higher level of deposit?
- Are you interested in changing your car regularly?
- Are you prepared to refinance to keep the car?
- Are you prepared for negative equity?
- Does a balloon payment concern you?
If you answered yes to the majority of the questions above, then HP is for you. If you were more on the side of no, then PCP is your best bet.
I will reiterate however that which choice is best comes down to the individual and their specific situation. PCP was introduced to meet a need in the modern world where people like to change their cars more regularly, and facilitates this extremely well – despite making the actual finance product more complex. However, this doesn’t necessarily make it the right choice in all cases.
The most important question you should always ask yourself:
- Can you afford the finance deal you are looking at?
There is no need to financially overstretch yourself to get that dream car. The most important thing you should always be considering is affordability, and being financially stable after your decision.
If you are worried about your levels of debt – or if you are worried about your financial situation in general – there are lots of people you can talk to. The government provides free debt advice for those in need, and there are various charities that will provide emotional support and advice for those who feel they are in over their heads – and we all feel like that sometimes don’t we? There is no shame in getting help if you need it.
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About the Author
Sam Wardega is a freelance car journalist working on behalf of Carsnip.com.
A lifetime Petrolhead who started with Hot Wheels aged 2, and now just spends his life savings on owning his dream cars. As they say, boys don’t stop playing with toys; they just get bigger and more expensive!
Disclaimer: The content contained in this article is for information only purposes, and does not constitute financial advice in any way. Carsnip is a search engine for buyers to find a new car, and does not endorse any of the finance products presented by the dealers who may advertise our website. This information is correct at the time of publishing. Any queries should be directed to contact@carsnip.com