Home Motoring Hire Purchase, Lease Purchase & PCP Explained

Hire Purchase, Lease Purchase & PCP Explained

by Dave

When you are out there looking to buy a new car, you also have to make sure that your finance is a low-cost one. You certainly won’t like to end up bearing heavier costs owing to higher interest rates. There are different kinds of car loans available under different categories and varying conditions. Three of the most popular ways of securing car finance is through:

  1. Hire purchase
  2. Lease purchase
  3. PCP or Personal contract purchase

Their features, pros and cons have been explained below:

Hire Purchase: Hire Purchase system is a popular way to get a new car. Under this system, the buyer is required to make an initial deposit, known as down payment, and the rest is paid in instalments bit by bit. For instance, if a person buys a car of the value of $20,000, he can may a down payment of, say, $2,000, and pay the rest ($18,000 + interest) in 10 or 20 or more monthly instalments. Various factors like the amount of down payment, number of instalments and the value of the car go into deciding the interest rate. The person gets to use the car but the ownership title is passed only after the last instalment is paid.

Pros of HP system:

  1. The biggest pro is that you can use the car only after the payment of initial deposit.
  2. You get some flexibility in terms of down payment. You also receive convenient facility to make regular payments in small denominations.

Cons of HP system:

  1. You don’t get the ownership right until you pay off the full instalment. This implies that you cannot sell the vehicle and have to be careful with how you use it.
  2. Interest rates are usually exorbitant.

Personal Contract Purchase (PCP): PCP allows you to pay small instalments every month. These instalments are chiefly the amount of depreciation which the car suffers. So, the amount you pay may vary on its usage and the condition/depreciation of the vehicle. After the contract expires, you can secure the ownership by paying the lump sum amount known as Guaranteed Future Value or GFV.

Pros of PCP:

  1. It is simple to understand and very convenient for the user. You just need to pay for the depreciation i.e. for the value of car you are using.
  2. You can terminate the contract at the end and return the vehicle without having to pay the GFV.
  3. The monthly instalment is lesser than most other forms of car loans.

Cons of PCP:

  1. It can become expensive if you cross the mileage barrier set for you.
  2. You do not get ownership.
  3. You will have to bear insurance cost till the contract expires.

Lease purchase: Lease Purchase (LP) is similar to PCP. Here you need to pay the Residual Value at the end of the contracting period and must make small monthly payments.

Pros of LP:

  1. Lower monthly instalments
  2. Flexibility in terms of payment
  3. Less risk

Cons of LP:

  1. No option to terminate the contract, as you must make full payment towards the end.


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