HIRE PURCHASE (HP)
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 (PCP)
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 called the Guaranteed Future Value (GFV). 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 GFV, 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:
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 GFV payment.