Choosing how to pay for a car can matter as much as choosing the car itself. The four common routes, PCP, hire purchase, leasing and paying in full, can leave you in very different positions a few years later, even when the car on the driveway is identical.
V5 Solutions has set out how each option works, then compared them on the points that most affect the overall cost. We finish with a look at one benefit of ownership that is often overlooked.
How Each Option Works
Personal contract purchase (PCP)
With PCP, you put down a deposit and make monthly payments for a set term, often three or four years. A large share of the car's value is held back as an optional final payment, which keeps the monthly cost lower. When the term ends you choose whether to pay that sum and own the car, return it, or part-exchange it.
Hire purchase (HP)
HP spreads the whole price, after any deposit, across fixed monthly payments. Monthly costs are higher than PCP for the same car, but once every payment is made the car belongs to you.
Personal leasing
Personal contract hire is a long-term rental. You pay an initial rental and then a fixed monthly amount, and the car goes back at the end. Some deals include servicing. There is no option to buy.
Paying in full
You buy the car with your own money, new or used. There are no monthly payments, and you hold the logbook as registered keeper from the start.
Comparing the Total Cost
To compare fairly, work out the total you will pay over the same number of years and set it against the value of anything you keep afterwards.
- PCP: deposit, monthly payments and the final payment if you want to keep the car. Without that payment, you finish with no car.
- HP: deposit and monthly payments, plus any purchase fee. You finish with a car you can keep or sell.
- Leasing: initial rental, monthly payments and any end-of-contract charges. You finish with no car.
- Paying in full: the purchase price, plus the savings interest you give up. You finish with a car worth whatever it has depreciated to.
Depreciation sits behind all of these numbers. Cars typically lose a large share of their value early on, and finance or lease payments on a new car are mostly paying for that loss. Buying a car that is a few years old, and keeping it for longer, avoids the steepest part of the curve.
Flexibility, Mileage and Condition
PCP and leasing agreements set an annual mileage limit and expect the car back in good condition, with charges if you exceed either. HP and outright ownership have no mileage limits.
If you need to leave a finance agreement early, the rules differ. Under the Consumer Credit Act, HP and PCP customers can hand the car back at any time provided they have paid, or pay, half the total amount payable, known as voluntary termination. Leases are hire agreements, so ending one early can be expensive. Planning ahead for regular motoring costs, as shown in our guide to expense planning, helps whichever option you choose.
Which Option Suits Which Driver?
- Drivers who want a new car every few years and accept never owning one may prefer leasing or PCP.
- Drivers who want to own the car but cannot pay in one go may suit HP.
- Drivers who cover high mileage or keep cars for many years may find buying outright costs less overall.
Borrowing Against a Car You Own Outright
When a car is fully paid for, you control it. You can sell it, keep it as long as you like and, if needed, use it as security for borrowing. A logbook loan from V5 Solutions lets you borrow between £1,000 and £50,000 using your car, van or motorbike as security, provided you own it and there is no outstanding finance, while you carry on driving it. Terms run from 18 to 60 months, and you can settle early at any time with a rebate on interest. Our guide to how logbook loans work explains each step.
This type of borrowing is expensive and uses your vehicle as security, so think carefully and look at cheaper alternatives first. This article is general information, not financial advice. For free, impartial help with your own situation, visit MoneyHelper.
Your car may be repossessed if you do not keep up repayments on a loan secured against it.
