Irelands first Car Finance Comparison Website
Hire Purchase (HP) is one of the most popular ways of financing your vehicle. You normally pay an initial deposit, (cash and/or your trade-in), followed by monthly payments for between 12 and 60 months. At the end of this period, following the final payment, the car is yours. There are both advantages and disadvantages to buying a car by HP agreement. You can drive the car out of the garage after paying the deposit, thus avoiding having to have the full purchase price or sorting out a loan elsewhere. Interest is fixed for the duration of the agreement. In most circumstances, you will pay less overall, than by buying via a PCP arrangement. The car becomes yours when the last payment is made. However, while you will pay less for the car over the full period, you will be paying more per month, because there is no final “balloon” payment that reduces the monthly repayment present in a PCP deal. Also, if your circumstances change you won’t be able to sell the car unless you settle the finance agreement in full, first.
Personal Contract Purchase (PCP) is structured differently than a simple HP agreement. There is no initial agreement to buy the car. This decision comes at the end of a PCP agreement. Similar to a HP agreement you pay an initial deposit followed by monthly payments and these are typically structured over 36 months. A Guaranteed Minimum Future Value (GMFV) – ‘balloon payment’ – is also initially calculated which is the car’s expected value at the end of the agreement. When you reach the end of the agreement you have three choices/options:-
Again there are advantages and disadvantages. Because you are not financing the whole value of the car, less your deposit, the repayments are less. This can be used to your advantage to “buy” a model with a higher specification. If the arrangement works out, you could be driving a new car every three years without the bother of trying to sell it at the end of the agreement or being out of warranty – assuming of course the warranty you get is for the same duration as the PCP agreement, or longer. For repayment certainty the interest is fixed for the duration of the agreement. On the negative side, if you decide at the end of the agreement to keep the car, your overall payments will be higher than if you had bought the car via a HP agreement. You will also have to make provision or finance the GMFV at the end of the agreement. Avoiding this may be the very reason you opted for a PCP agreement in the first place. You won’t own the car until the last payment is made and there could be additional costs if you exceed the agreed mileage or the car hasn’t been looked after properly.
Both of these arrangements have merit. Your decision will be based on your appetite to own the car, or on the monthly cost differential between the two agreements. Either way, the beauty of both of these arrangements is that you will be able to “do the deal” at the dealer’s, thus avoiding the need to sort out finance with a third party.