HP vs PCP

SevenOfWine

Hi guys,
Prepping to buy a car with a small deposit and will finance the balance. Would appreciate pros and cons of the PCP vs HP options, please? 

PCP is cheaper on a monthly basis, but long term...?

daveyjp

https://www.carbuyer.co.uk/tips-and-advice/160231/pcp-vs-hp-whats-the-difference

DrEskimo

Look at the cost of interest, not just the APR. Whilst the APR may be higher for a HP, the actual cost in interest could be higher for PCP. The argument that PCP is good as it 'protects against depreciation' is only relevant when you look at what the final payment is, and how much it is costing. If you are going to get PCP and then save extra aside each month to pay the final payment, you may as well go for a HP and save on interest costs. You may be able to get a cheaper rate from a unsecured personal loan than HP (depends on the deal).

The only thing I am interested in is how much does the loan cost. I keep this as low as possible by looking at the total cost and choosing the lowest cost, but mostly by avoiding finance altogether....

Car finance can muddy the comparison by adding in contributions and perks. I tend to use finance to get these perks and contributions and then settle with cash though.

SevenOfWine

Thank you!

AdrianC

Very short version...

Both: You borrow the price of the car, less any up-front.
HP: You repay the entire borrowings through the term. At the end, you own the car.
PCP: You repay just the depreciation through the term, plus interest on the lot. At the end, you can buy the car or walk away.

So for PCP, you're borrowing more money for longer, so paying more interest.
Let's say that it's a £20k car, £0 up front, £10k balloon at the end of the PCP.
HP: You're borrowing £20k over three years.
PCP: You're effectively borrowing £20k over six years.

CarMad95

I think they've both summarised it quite well.

It depends what you want out of your finance.

If you want lower monthly payments a PCP will have normally be lower because you're not paying off all of the car.

For most people PCP is comparible to a lease where they pay monthly for a car and at the end of the agreement switch to another. Unlike a lease, it is technically a finance agreement which means you have more options and protections. It's easier to end a PCP early than it is for a lease for example.

Grumpy_chap

Dealers seems to promote PCP over HP.  The reason for that is PCP benefits the dealer more and HP benefits the customer more.

macman

What are your intentions at the end of 3 or 4 years? That will mainly determine your choice.

DrEskimo

macman said:

What are your intentions at the end of 3 or 4 years? That will mainly determine your choice.

Not particularly....

Whether you you buy outright, or finance on HP or PCP trading the car in after X years is exactly the same process.

AdrianC

DrEskimo said:

macman said:

What are your intentions at the end of 3 or 4 years? That will mainly determine your choice.

Not particularly....

Whether you you buy outright, or finance on HP or PCP trading the car in after X years is exactly the same process.

PCP gives you a backstop on value, though.
Against that, HP gives you more flexibility on timing.

DrEskimo

AdrianC said:

DrEskimo said:

macman said:

What are your intentions at the end of 3 or 4 years? That will mainly determine your choice.

Not particularly....

Whether you you buy outright, or finance on HP or PCP trading the car in after X years is exactly the same process.

PCP gives you a backstop on value, though.
Against that, HP gives you more flexibility on timing.

Yes but the mere existence of a guaranteed trade price is not in itself a positive. It depends on what that value is and how much it is costing to get it.

We know a GFV of £100 is probably of little use, and a GFV of similar cost to the car is probably quite handy (in effect that would just be an interest only loan...!). So the pertinent question is, at what point does it actually prove to be an economic advantage?

That's why every deal has to be examined. What is the likelihood that the car will be worth less than the GFV set, and how much extra is it costing relative to the other methods of buying to get the GFV.

Hardly worth it if the car has a very low chance of being worth less than the GFV, and it's costing an extra £1,000 in interest....it would take unreasonable falls in the cars value before you begin to see any advantage at all.