Guides

Glossary

News

So, you’re thinking of leasing or buying a car but aren’t sure about the different <a href="https://www.caruno.co.uk/car-finance">finance options available</a>? Plus, there’s deposits, monthly repayments, road tax, maintenance plans, insurance, MOT, repairs, and all the other expenses that come with a car to consider.&nbsp;

All of these factors are enough to make anyone nervous. Fortunately, there are several finance options available for drivers that can help you to secure the right car. These options help make the process more affordable, and may even place higher-end cars within your reach.

However, with so many acronyms like PCP, PCH and HP being used in the motor industry, it can all get a little confusing. What are these finance options, and which one is right for you?

With this in mind, here is car finance explained: What’s the difference between PCP, PCH, and HP?

A <a href="https://www.caruno.co.uk/car-finance/personal-contract-purchase/">personal contract purchase</a> or PCP, effectively works like a long-term rental agreement, and is a great option for those of you in two minds about buying or leasing a car.

This agreement will usually begin with the customer paying a deposit. The larger the deposit you choose to pay, the lower the set monthly repayments will be. At caruno, some of our cars are offered with a <a href="https://www.caruno.co.uk/car-finance/no-deposit-car-finance">zero-deposit option</a>.

Additionally, the fixed monthly rates are also based on the expected depreciation of the car. This is the difference between the car’s value at the start of your agreement and its resale value at the end of the agreement. Therefore, the age and the predicted annual mileage limit of the car will be considered. The lower your annual mileage is set, the more value the car will hold over time, and the lower your monthly payments will be.&nbsp;

As you’re not paying for the full value of the car with a PCP deal, the monthly repayments are typically cheaper than getting a car on hire purchase or paying for it outright. You’ll also have a wider choice of cars too.&nbsp;

At the end of the agreement, you’ll get the option to return the car, to make a final balloon payment and become the legal owner of the vehicle, or you can trade it in for a newer make and model, which is a great option if the car has any positive equity.

mediaLibraryStrapi

A <a href="https://www.caruno.co.uk/car-finance/hire-purchase/">hire purchase</a> or HP, is the go-to option for buying a car on finance. It allows you to spread the cost of the car over an extended period and ends with you becoming the legal owner of the car.&nbsp;

You select the car you want to buy, decide how much deposit you want to put down, and how long you’d like to pay off the remaining amount – usually 24 to 60 months. HP is essentially a loan from a finance company that’s equal to the value of your desired car, minus the amount of the deposit you put down.

HP is considered a lower risk option for the car company as the finance is secured against the car, meaning that if you fall behind with your payments, your car could be repossessed.&nbsp;

You’ll repay the full cost of the car plus interest, through fixed monthly payments, over the duration of the agreement.&nbsp;

Upon completion of the monthly payments, the car will be officially signed over to you. With some deals, you’ll have to make one final payment in the form of a processing fee called an “Option to Purchase” fee. This can be as little as £1 and go up to £200 depending on your agreement.&nbsp;

What is personal contract purchase (PCP)?&nbsp;

PCP is a great finance option for those in two minds about buying or leasing a car. With PCP finance, you’ll get the option to purchase the car at the end of the lease agreement.

In truth, you’ve a better chance of obtaining PCP finance if you’re someone with good credit. You may still be able to qualify for PCP with a less-than-perfect credit score, however, the <a href="https://www.investopedia.com/terms/a/apr.asp">annual percentage rate</a> (APR) you’re quoted will likely be higher.&nbsp;

Read: <a href="https://www.caruno.co.uk/advice-and-guides/car-finance-with-bad-credit">Can I get car finance with bad credit?</a>

Yes, some companies may insist on a deposit at the beginning of the agreement. The exact amount you pay is up to you. Cars with a higher value may require larger deposits. In many cases, the higher the deposit, the lower your monthly repayments will be.

Is there a balloon payment with PCP?&nbsp;

Yes, if you decide to purchase the car at the end of the agreement, you’ll need to make a final balloon payment to cover the remaining value of the car. You will then become the legal owner of the car.&nbsp;

Before you pay your deposit, you’ll have to select your annual mileage limit, and the length of the contract term – this is how long you want to drive the car for. The duration of PCP agreements is usually between 24 to 48 months.

Can I finish a PCP agreement early?&nbsp;

There are two options to ending your PCP agreement early. It all depends on how much you have already paid. You can opt for either voluntary termination or early settlement.

You’ve every right to terminate your PCP contract after you’ve paid 50 per cent of the total agreed upon amount.&nbsp; This is called voluntary termination. If you’ve paid more than 50%, you won’t be refunded the excess. You’ll also have to return the car immediately after termination of the agreement.

If you’ve not yet paid off 50 per cent of the total amount, you can still get out of your finance contract through an early settlement. This option is only for those who can afford to pay off the full remaining balance, or if the trade-in value of the car is more than the settlement payment.

What happens at the end of a PCP agreement?&nbsp;

You’ll have three options at the end of your PCP agreement.

1.&nbsp;You can simply return the car to the lender

If you’ve gone over your annual mileage agreement limit, or there’s any damage to the car, you’ll be charged. Besides these possible extra expenses, you won’t have to make any other payments and can hand the car back to the motor/finance company, and walk away.

2.&nbsp;You can opt to make a final balloon payment in order to take ownership of the car

The second option is making a final balloon payment. This payment will cover the remaining cost of the car based on the Guaranteed Future Value amount that was calculated at the start of your agreement. After making this payment, you’ll have full ownership of the car.

3. You can part-exchange the car for a new vehicle, on a new finance deal.

The third option is to part exchange the car for a brand-new finance agreement. In this way, the equity/value left in the car will be used as part of a deposit on the new finance agreement. This won’t be possible if your car doesn’t have positive equity.

PCH is a great choice for drivers who want to change their car relatively often, without having to pay interest on their monthly repayments. This means you’ll never own the car or have to worry about depreciation and selling it on.

PCH, like PCP, is easier to get if you have a favourable credit history. If your credit score is not-so-perfect, this could pose more of a challenge, as lenders will view your PCH application as risky.&nbsp;&nbsp;

Caruno works with a diverse panel of lenders that are equipped to consider applicants from all credit backgrounds. We are bad credit car specialists and can even help anyone who may have previously hit a bump in the road financially.&nbsp;

Read: <a href="https://www.caruno.co.uk/advice-and-guides/can-i-finance-with-iva-or-ccj">Can I get car finance with an IVA or CCJ?</a>

If you choose PCH finance, you’ll be given the option to make an initial payment at the beginning of the agreement. This amount is usually the equivalent of three to six months of your repayments. However, both the initial payment and the term of the agreement can be adjusted to meet the budget that’s best suited to you.

How much are monthly repayments with PCH?&nbsp;

Monthly repayments tend to be less than those of a PCP or an HP agreement. This is because PCH repayments are fixed for the duration of the agreement and aren’t calculated on depreciation price or the full value of the car.&nbsp;

The monthly repayment rates will also depend on the size the initial payment you put down. The larger the amount, the lower the monthly repayments will be.

PCH deals on new cars will likely include road tax, and you have the option of including a maintenance plan for repairs and breakdown assistance for a small fee. This offers extra peace of mind should something unexpected happen.&nbsp;

The length of PCH agreements can vary from deal to deal, however, usually you can select anything from 24 to 48 months.

Can I finish a PCH agreement early?&nbsp;

Usually, you can’t end a PCH agreement early. If you are struggling to make payments, it’s worth speaking directly with the finance company to see what options they can offer.

With PCH agreements, you can’t just cancel the contract at any time. You can’t swap your car for another one during the agreement, and you must adhere to all of the terms of the contract until completion. This includes keeping the car in good condition and sticking to your annual mileage limit.

What happens at the end of a PCH agreement?&nbsp;

Upon completion of the agreement, you can simply hand your car back to the finance company and walk away. The company will thoroughly inspect the car, and you’ll have to pay for any excess damage outside of the industry-standard fair wear and tear guidelines, along with any excess mileage charges that apply.&nbsp;

After this, the terms of your contract will have been completed and you are free to choose a new vehicle and start a new agreement.&nbsp;

PCH doesn’t give you the option to make a final balloon payment to purchase the car.

HP is best suited for anyone who wants to own a car, and is able to afford slightly higher monthly payments over the duration of the agreement, to cover the full cost of the car.

Do I need to pay a deposit with HP?&nbsp;

Yes, you will be asked to put down a deposit of at least 10 per cent of the car’s full value. The larger the deposit you put down the lower the monthly repayments will be.

How much are monthly repayments with HP?&nbsp;

Your monthly repayments will be based on a few different factors.

The more you put down initially, the lower your monthly rates will be.

2.&nbsp;The length of the agreement

If you choose a longer term to clear the finance, your monthly payments will likely be lower, however, this’ll increase the amount of interest you’ll have to pay. So, in the long term, you may end up paying more.

It goes without saying that the higher the value of the car you’re buying, the higher your monthly payments will be.

The length of HP agreements usually ranges from 24 to 60 months, depending on your budget and preferences.

With most HP agreements, you’ll have the option to settle your agreement early. In order to do this, you’ll have to pay off the outstanding amount of finance with one lump sum or an early repayment schedule where you can choose to pay a higher amount each month until it’s cleared.

There are some agreements that will only allow you to settle your agreement early, after a certain number of repayments have been made.

What happens at the end of a HP agreement?&nbsp;

Once you have completed all your required repayments, the ownership of the car will be transferred from the finance company to you. This can be subject to an option to purchase fee.

Explore your finance options with caruno&nbsp;

Take advantage of our soft credit searches that provide instant decisions, without affecting your credit score. Try our fast and easy <a href="https://www.caruno.co.uk/car-finance/eligibility-checker/">eligibility checker</a> to find out your likelihood of approval for car finance.

Get started

Search by popular makes

Search by popular models

Finance with caruno

Related FAQs

Unlock the value of your old car

Learn about caruno

Related FAQs

Help & Resources

Get in touch

Car finance explained: What’s the difference between PCP, PCH, and HP?