HP vs PCP vs PCH vs Salary Sacrifice: Which Is Cheaper?

Making the right choice for car finance options really matters. It can save you a lot of money over the agreed period. This guide helps you understand and compare Hire Purchase (HP), Personal Contract Purchase (PCP), Personal Contract Hire (PCH), and Salary Sacrifice agreements. You will read how each finance agreement works. You can learn who is the legal owner of the car at the end of the deal. The guide helps you see how the large final payment you pay in a pcp deal looks next to the monthly instalments you pay in an hp deal. Also, you can read about the mileage limits and find out what fair wear charges mean on leases. There is a simple example so you know how salary-sacrifice works. See the tables to check the total cost. This way, you can compare car finance options before you sign your agreement.

What each option actually is (in two lines)

• HP (Hire Purchase) – A hire purchase agreement is when you pay an initial deposit and then cover the car cost by making a series of monthly payments. You pay all of the price and also pay some interest. After you make the final monthly payment and pay a small option fee, you become the owner of the car. There is no mileage limit set in the contract.
• PCP (Personal Contract Purchase) – With PCP car finance, you can have a lower monthly payment because there is a large final payment (called the balloon) at the end of the loan. When you reach the end of your agreement, you can either pay the balloon to keep the car. You could part exchange it for your next car, or you can hand it back if you kept to the mileage limit and the car matches the fair wear rules in the PCP contract.
• PCH (Personal Contract Hire) – This is a way of car leasing. You pick a lease deal for a set number of miles and over a certain period of time. At the end of the lease, you just hand the car back. You do not get the choice to buy the car. It can cost a lot if you want to end the contract early.
• **Salary Sacrifice

Ownership, mileage and end-of-term: key differences

Which is cheapest? (illustrative)

If the cash price is £20,000, the initial deposit will be £2,000. The loan would then be for £18,000. The APR you get is 9.9%. The loan will last 48 months. A PCP plan needs a balloon payment at the end. This is 35%, or £7,000. For PCH, the rental amount you see is in the normal range for the market.

PCP lets you make lower payments each month. After that, you need to pay a big last payment, called a balloon payment, if you want to keep the car. In the end, HP may cost you less if you decide to own the car. PCH gives you lower payments so you can use the car, but you do not own it, and you will not get any money from it later. Always compare car finance quotes and PCP deal with hp deal or any personal loan you find.

Salary Sacrifice made simple (EV example)

This works because you give up part of your pay before tax to use the car. This way, you save on both Income Tax and National Insurance. After that, if you choose an electric car, you only have to pay a small amount of BIK tax.

Illustrative (basic-rate taxpayer):

• Lease line: You pay £400 each month.
• The tax and NI you save when you do the salary sacrifice is about £112 each month.
• The BIK for a £20,000 electric car at 2% is £400 a year. This works out to about £33.33 each month, and you pay around £6.67 tax.
• Estimated net cost: You end up paying about £294.67 each month.

What you get will depend on your tax bracket, the plan your company offers, and what your company has added to it. This can be things like maintenance or insurance.

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The anatomy of payments (so you aren’t surprised)

• HP – You pay for the car in a series of monthly payments. There is not a big final payment at the end. The last monthly payment is small, called the option fee. After you make it, you become the owner of the car.
• PCP – You have lower monthly instalments. A large final payment, also called a balloon, will be due at the end of the deal. The big difference is this: When you get to the end of the deal, you can choose to pay the large final payment to keep the car, return the car, or part-exchange it.
• PCH – You pay rentals for an agreed period and for a set number of miles. At the end, you give the car back.
• Salary Sacrifice – This is like a lease with your employer.

Mileage and depreciation: set this right at the start

The mileage of the car is important because it affects the depreciation of the car. How many miles you drive also changes what you pay at the end of your agreement for balloon (PCP) or rental (PCH). If you say you will drive fewer miles than you actually do, you will have to pay excess mileage charges when the agreement ends. If you say you will drive more miles but use less, you end up paying too much each month. It’s good to check your own commute and trips to pick the number of miles that fits you.

How to choose the best option for your next car

1. Decide on ownership. If you want to keep your next car for a longer period of time, HP or paying with cash can be the best option. If you like easy, planned costs for your next car, PCP or PCH could be the better option.
2. Budget for the end. With PCP, get ready for the balloon payment when you reach the end of the loan. With PCH, you need to hand your next car back at the end of the lease.
3. Compare quotes. Ask the dealer, your bank for a personal loan, and at least one other finance company. The APR and fees can make a big difference in cost. Always look at several car finance options before you agree to any deal.
4. Sense-check with car reviews. Check out car reviews to see what people say about the depreciation of the car and about how reliable it is. This helps you know what you will get, so you can avoid surprises over time.

End-of-term choices on PCP (quick table)

Car at term with balloon £7,000.

Early exits and your rights

• HP/PCP early settlement: You can ask the finance company to give you a settlement figure. UK rules say you get some interest back if you pay early, but there may be a small admin or settlement fee.
• PCP voluntary termination: You have the legal right to end the contract after you pay 50% of the total amount payable. You will have to give the car back in good condition.
• PCH early termination: In most cases, you will have to pay a fee based on the rentals you still have left.
• Salary Sacrifice: The scheme’s rules will apply if you stop working for your employer or if your work hours change.

Beyond the basics: what most people actually do

The most common ways to pay for a car purchase are an HP deal, a PCP deal, or a lease deal. Some people also go for a personal loan because it can give more flexibility. There is not one best way that works for everyone. The best option for you will depend on how many miles you drive, how long you keep your cars, your cash-flow, and if you want to be the legal owner of the car or if you are okay with giving it back later.

Total cost of ownership: what really drives the difference

No matter what type of finance agreement you have, the total amount you will pay during the agreed period comes down to four things.

1. Depreciation of the car – this is how much the car loses value over time. For a new car, this is the biggest part of the cost you pay if you look at new car deals.
2. Interest and fees – you also need to pay interest, admin fees, the final monthly payment, and sometimes a large final payment when you reach the end of the loan.
3. Mileage & condition – the number of miles you drive and how you look after the car matter. These will change what you get when you give the car back after PCP or PCH, or when you swap on HP.
4. Extras – this can be for things like care packs, tyres, GAP cover, delivery, and any money you must pay if you leave before your deal ends.

Because cars lose value so fast, the best option for most people is to go with the one that lets them drive the car they want, for the period of time they need it, and at the lowest cost overall. You should look at the total cost, not only the monthly payment.

Mileage matters more than you think

With PCP or PCH, the cost you pay has the mileage limit built in. If you pick a low mileage when you choose a PCP deal or lease deal, just to make the monthly payment cheaper, it can cause you problems at the end of the lease or at the end of your agreement.

• For example, if you drive 6,000 miles over the limit, you need to use 12p for each mile. You will have to pay £720 all at once. This is in addition to any costs for fair wear.
• If you change your drive to work, you should check with your finance company about a mid-term mileage uplift. Most times, using this is less money than paying all the extra costs at the end.
• If you have HP, there is not a set limit for miles. But, the mileage of the car still has an impact on how much you get when you sell it. A big difference in miles can affect what they offer you at trade-in.

The best way to do this is to look at how many miles you drove last year. Add up miles from trips you take in each season. Then, round the number up a little. This helps you not get surprised later. It also lets you keep options open when you get your next car.

Ownership vs use: who should pick which?

• If you want a new car for a longer period of time, like about 4–7 years, and want to have control over the miles you drive or any changes you make to the car, then a hire purchase agreement or even a personal loan might be a better option for you. With this, you become the owner of the car once you finish the last monthly instalment. There is not a large final payment at the end, so you do not have to worry about it.
• If you like to change your new car every 2–3 years and want to enjoy car deals that come with a warranty, PCP car finance could be the best option. You pay steady monthly instalments and you have several ways to leave at the end of the deal.
• If you just want to use a new car and do not want to own it, car leasing (PCH) is simple. You pay fixed rentals for a set period of time, and then you give the car back when that time ends.
• If you are a PAYE employee thinking about an electric car, a Salary Sacrifice deal can be better than personal leasing. This is because you get savings on tax and NI, and you also get lower BIK on electric cars.

Remember, in HP or PCP, the funder be the legal owner of the car until you make the last fee or balloon payment. In PCH and Salary Sacrifice, you not be the owner of the car at any time. So, it be important to give back the car in a return-ready condition.

Case study: two ways to the same next car

Driver A — HP focus (own and keep)

• A person picks an HP deal on a two-year-old used car. This helps to avoid paying for early depreciation of the car.
• The monthly payment for this used car is higher than you get with a new model PCP, but you do not have to make a large final payment. When you sell the car, you stand a good chance to get some equity.
• This is the best option if you want to own your car for a longer period of time.

Driver B — PCP focus (flexibility and low monthly)

• The person goes for a PCP contract on a brand new model. This deal comes with a balloon payment at the end.
• They make lower payments during the agreed period. When it is the end of the loan, they can pay the balloon, use part exchange to get a next car, or return the car.
• This is a better option for those who care about tech and warranty. It is also good if you want steady cash-flow.

Both of you need to look at car finance options. You should compare a bank’s personal loan with dealer HP or PCP. Think about finance options from an independent lender as well. The APR and any fees can change which choice is good for you.

Credit profile, approvals and LTV (plain-English)

• HP/PCP: The underwriters look at your credit score and if you can pay for the car. They also check how much you want to borrow compared to what the car is worth. If you can give a good initial deposit, it may help you get the deal.
• PCH: People see mostly the same things for checks. Some lenders may be tougher on people who do not have much credit history.
• Salary Sacrifice: The employer signs the contract for the car. The employees have to follow all the scheme rules. There are extra options to help, like if you lose your job or feel too sick to work, but these can change with each scheme. Be sure to read all the details that come with your scheme.

If the APR you get is high, you can check a bank personal loan along with your other finance options. This will help you find a better choice and may help you save money.

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End-of-term costs you can actually control

Whether you are at the end of the lease or the end of your agreement, you can do small things to help save money.

• Tyres & glass: Change tyres when they are getting old or worn out. If you see a chip in the glass, fix it right away.
• Service history: Keep your services up to date. This helps keep the car’s value when you want to sell it, and can stop problems when you give back the car.
• Two keys & accessories: If the car does not have things like both keys, an SD card, or a charging cable, you will get a set fee for each missing item.
• Valet and photos: Clean the car well. Take photos that clearly show the date and time. This is helpful if people ask questions about the car’s fair wear later.

For PCP, it is good to set up the inspection a little before the end of the deal. This way, you have time to fix small problems, and you can do it at shop rates.

Switching to an electric car: where each option fits

• PCP can be the best way to get a new car, especially if you want an electric car but do not know what the future value will be. You get the choice to give the car back when the period of time ends.
• PCH often has some of the best new car deals for an electric car. A number of miles is set in the deal, and the cost of maintenance is usually included.
• A Salary Sacrifice scheme is one of the best ways for employees who get paid through PAYE. The extra costs for benefits are low, but you should check if the rules for ending the agreement early work for you. This is important if you think you might change your job or go on parental leave.
• HP is a good choice for people who want to be the owner of the car and keep their electric car for a longer period of time. If you want the car for home charging or to use in your business, this can be the best way.

No matter which way you go, make sure you compare car finance quotes before you choose. EV deals can really change a lot based on the brand and who gives the money.

Timing and negotiation tips (that don’t rely on luck)

• Quote stack: You need to get at least three quotes if you want to find the best option for the same car. Try to get one from a dealer, one from a bank, and one from an independent seller. Make sure every quote you get is for the same PCP deal or hp deal, with the same agreed period and the same mileage as the others.
• Total not just monthly: You should always look at the total cost to you for the whole agreed period and not just focus on the monthly payment. Add up the large final payment, any option fees, and the predicted charges when you return the car. This way, you get the full price that you will pay.
• Part-exchange maths: If you want to part-exchange your car, you need to check two strong prices. A higher price to buy your car can be better for you than a pcp deal or hp deal with a lower interest rate.
• End-of-quarter stock pushes: Sometimes these can help you get a good pcp deal. But do not pick any pcp deal or hp deal just because it is the end of the quarter. Always let the numbers guide you so you get the best option for you and what you need.

Mid-term changes: can you switch track?

• HP/PCP: you can ask for a settlement figure and move to another product. For example, you could switch from PCP to HP. You might be able to change your car with part exchange if there is enough equity for you to do it.
• PCH: you can do mid-term swaps while you are still in the agreement. The swap may bring some end of the lease fees. It could also mean you get a new price for your rental payments.
• Salary Sacrifice: what you can do depends on the rules for this scheme. Some plans let you swap or return the car early if certain things happen. A few even protect you from some situations.

A quick decision matrix (use with your quotes)

FAQs About HP vs PCP vs PCH vs Salary Sacrifice

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