The difference between PCP and HP car finance options

Are you looking at financing your new Mercedes-Benz but are confused by all the payment options? PCP and HP are among the most well-known car financing options, but what’s the difference between the two? In fact, there are several major distinctions between a personal contract plan (PCP) and a hire purchase (HP) agreement, so it’s worth knowing a bit of extra detail about exactly what each option entails.

This blog highlights exactly what the differences are between them and why you might choose to use one or the other, depending on your circumstances.

How does Hire Purchase work?

Whenever you buy a car using Mercedes-Benz provided finance, you’re essentially borrowing money from Mercedes-Benz Financial Services. You’ll typically pay a proportion of the cost at the beginning of the finance agreement, in the form of a deposit.

Under a HP agreement, the buyer will borrow the balance remaining after this deposit is made. The balance then be paid off over an agreed duration, typically 36 or 48 months.

The amount you place as a deposit and the duration of the finance scheme will determine the size of your monthly payment, with the addition of any interest charged. This will be presented as an annual percentage rate (APR) figure.

At the end of the HP scheme, you’ll have paid the full price of the car, any interest due plus any additional purchase fees agreed to. The car now belongs to you.

How does Personal Contract Plan work?

The amount borrowed is a lot less with a PCP scheme as you only borrow a proportion of the cost of the car. As with a HP scheme, your initial deposit influences the balance that remains to be paid – the difference is that this is offset by how much the car will be worth at the end of the agreement. Crucially, it means that a monthly PCP payment on a new car will be far lower than a typical HP payment on the same car.

Every PCP is built around a figure often called the Optional Purchase Price (OPP). This can vary enormously from one car to another and you can sometimes find big differences between even trim levels and engine choices of a single model range. On a PCP you’re effectively borrowing the difference between that figure and the price of the car – less the deposit you’ve placed. Like a HP scheme, the amount borrowed will be divided across a given payment schedule, typically between 36 and 48 months.

Unlike HP, though, at the end of the PCP you won’t have paid the entire cost of the car. The OPP will still be outstanding. If you want to own the car outright, you’ll need to pay an optional final payment.

When should you choose PCP or HP?

The most important question is whether you want to own the car you’re buying outright at the end of the finance agreement. While a HP scheme covers the entire purchase price of the car, PCP does not unless you make the optional ‘final payment’, which covers the remaining value of the vehicle.

If you plan to regularly change your car, a PCP could suit you very well as there is a lot of flexibility while keeping monthly payments lower than a HP scheme. If you decide to own the car outright, you can pay the ‘optional final instalment’ and the car will be yours. Alternatively – and assuming there is damage to the vehicle or excess mileage that would cause it to be worth less than the OPP – you can hand the car back and walk away. The final option is to simply start again with another new car – thousands of motorists every year choose to do this and PCP is favoured by the majority of retail car buyers.

If you would like to find out more about our finance offers then please don’t hesitate to contact us as we have staff who will be happy to help you decide which option would be best for your circumstances!