When purchasing your vehicle on finance, you will have the
opportunity to fund it using one of two products; PCP (personal contract
purchase) and HP (hire purchase). The difference between the two
products is as follows:
Hire Purchase
Hire Purchase is a
little like a mortgage on a house where you pay an initial deposit and
then pay the balance over an agreed period of time in equal monthly
payments. Typically, agreements can run from 1 to 5 years. The vehicle
remains the property of the finance company until you make the last
payment. If you settle early, you will be offered a rebate of some of
the interest. However, you may find, with a small initial deposit, if
you settle very early, the amount owing may be more than the vehicle is
worth.
Hire Purchase may suit buyers who plan to keep their
vehicles for a longer period of time, perhaps longer than the agreement
term, who have a large deposit or want a simple agreement with no
commitment at the end of the term.
Personal Contract Purchase
Like Hire Purchase, an initial deposit is paid with monthly payments
over an agreed period of time. However, the final payment at the end of
the agreement is significantly larger than under a normal Hire Purchase
agreement, usually several thousand pounds. This is often called a
Guaranteed Manufacturers Future Value (GMFV) or Balloon Payment. This
makes the payments in-between the initial deposit and the large final
payment much smaller than with Hire Purchase and the agreements are
shorter.
You must pay this large final payment, the GMFV, at the
end of the agreement. However, the finance company will guarantee that
your vehicle will be worth at least this value as long as it is in a
suitable condition and covered less than an agreed mileage limit. This
gives you three options:
You can hand the vehicle back to the finance company to make the final payment.
You can pay the large final payment and keep the vehicle.
Usually, your vehicle should be worth more than the final payment. So
you can part exchange the vehicle, and use the extra that it is worth,
after paying off the large final payment, for a new vehicle.
Personal Contract Purchase may suit buyers that want a new or nearly new
vehicle and fully intend to change it at the end, or before the end, of
the agreement or want a more expensive vehicle than may be available to
them using other forms of finance. The disadvantage could be that
customers feel forced into changing their vehicle every 2 or 3 years to
avoid paying the large final payment.
