PCP or hire purchase: what you actually get

One difference, and everything follows from it

Both products are secured on the car and both leave the finance company as the legal owner until the last payment clears. Neither is a lease in the sense of never being able to own the vehicle.

Hire purchase amortises the amount financed to zero across the term. Every payment reduces the balance, and when the final one clears the car is yours with nothing left to decide.

A personal contract purchase amortises the amount financed down to a guaranteed future value instead. That value is not repaid during the term, but it accrues interest for the whole of it, which is what makes the monthly payment lower and the total cost higher for anybody who keeps the car.

• Hire purchase: balance to zero, car is yours at the end.
• PCP: balance to a guaranteed future value, which you pay, refinance or walk away from.
• Both are secured on the car and both make you the owner only at the end.

What the guaranteed future value actually is

The lender's guess at what the car will be worth at the end of the term, guaranteed by them rather than by you. It is calculated from the term, the mileage allowance and the model's expected residual value.

The mileage allowance is the part people underestimate. A higher allowance produces a lower guaranteed value, which raises the monthly payment, and exceeding the allowance produces a per mile charge on handback. Setting it honestly at the start is cheaper than being charged for it at the end.

The guarantee runs one way. If the car is worth less than the guaranteed value at the end you hand it back and that is the lender's problem. If it is worth more, that difference is equity you can put into the next car, and it is the reason a PCP sometimes rolls forward with no deposit.

The three endings on a PCP

Pay the guaranteed future value and keep the car. This is the most expensive route in total, because you have paid interest on that sum for the whole term and are only now repaying it.

Hand the car back and walk away. You owe nothing more, provided the car is within the mileage allowance and in fair condition. Excess mileage and damage charges are set by the finance company and are outside the quoted figures entirely.

Part exchange into a new agreement. Any equity above the guaranteed value goes towards the next deposit. This is how most PCPs actually end, and it is the reason the product exists in the shape it does.

Rights that come with both

Both are regulated consumer credit agreements, which brings two protections worth knowing. Voluntary termination lets you end the agreement once you have paid half the total amount payable, hand the car back and owe nothing further, provided it is in reasonable condition.

The second is protection against repossession. Once you have paid a third of the total amount payable the finance company cannot take the car back without a court order, which converts an aggressive process into a slow and public one.

There is also joint liability on the purchase itself. Where the car turns out to be faulty, the finance company is liable alongside the dealer, which is often a faster route to a remedy than arguing with the dealer alone.

• Voluntary termination: available once you have paid half the total amount payable.
• Protected goods: once a third is paid, repossession needs a court order.
• The lender is jointly liable with the dealer if the car is faulty.

Reading the quote properly

The APR is an annual effective rate. The monthly rate behind it is the twelfth root of one plus the APR, not the APR divided by twelve, and a comparison built on the wrong one understates the payment by a few pounds a month across forty eight of them.

Fees sit outside most advertised figures. A PCP normally carries an option to purchase fee at the end and some agreements add a documentation fee at the start. Ask for the total amount payable, which has to include them.

A manufacturer deposit contribution is a discount with a condition attached, and the condition is usually using their finance at a rate you would not otherwise take. Compare the total payable with and without it rather than treating the contribution as free money.

Which one, for whom

Hire purchase suits somebody who intends to keep the car for longer than the term and wants the lowest total cost. It costs more each month for exactly that reason, and there is no decision to make at the end.

A personal contract purchase suits somebody who changes car every three or four years, wants the lowest monthly payment for a given car, and is comfortable with a mileage allowance and a condition inspection at the end.

The third option is worth a comparison even though this guide is about the first two. A personal loan is unsecured, leaves you owning the car outright from day one, and is sometimes cheaper than either. The trade off is that you lose the joint liability protection that comes with a regulated finance agreement on the car itself.