With personal contract hire, you drive a brand new or nearly-new vehicle, complete with the manufacturer’s warranty. It allows you to drive one of the latest models on the market at a fraction of its regular purchase price.

It’s no wonder that PCH is increasing in popularity with UK motorists. In 2019, the BVRLA confirmed a 23 per cent increase in customers opting to use personal contract hire as a route to driving a new vehicle.

Personal Contract Purchase (PCP) operates in a similar way to PCH. As with a lease, monthly payments only cover part of the vehicles’ value – the amount it’s expected to lose in value throughout the contract. That means you get lower monthly payments in comparison with a traditional personal loan or HP deal.

At the end of a PCP contract, you can return the car and owe nothing (apart from potential excess mileage or damage charges which might apply).

You also have the option with PCP of buying the vehicle for the remaining amount owed – an optional final payment which is sometimes known as a ‘balloon payment’. Or, if the car is worth more than this final payment (known as equity), you can put this value towards the deposit of your next vehicle.

Purchasing a car doesn’t mean you have to pay for it all upfront. Hire Purchase (HP) spreads the cost of the car over a deposit and a series of monthly payments. You become the owner once the final payment is made.

Our guide below explains three of the most popular ways for you to finance a new or nearly-new car.

Pros of PCH:

• You get to drive new cars fitted with the latest in-car and safety technology that you may not be able to afford to buy

• Your monthly payments will be much lower than if you were buying it

• It’s hassle-free: at the end of the contract you hand the vehicle back and you’re free to lease a new car

• There’s no depreciation or disposal risk

• Flexible initial payment

• Fixed-term contract from 1 to 5 years

• Option to include maintenance with the contract

Cons of PCH:

• No option to buy the car at the end

• You will need to agree on an annual mileage allowance at the start of the contract – there might be an excess mileage charge if you exceed the allowance

• You are tied into the full duration of the contract – early termination may be expensive

• You must have fully comprehensive vehicle insurance

• The vehicle must be returned in a condition that meets BVRLA standards

Pros of PCP:

• The optional final balloon payment at the end of the contract means that you will only borrow part of the vehicle’s value rather than all of it, resulting in lower monthly repayments than what you would pay through a Hire Purchase agreement

• Flexibility – PCP gives you options – you can either pay the final balloon payment to keep the vehicle, return the vehicle and walk away, or give the car back and take out a new PCP agreement on another vehicle

• A guaranteed minimum future value – with PCP, you do not have to worry about depreciation as the lender will provide a guaranteed minimum value at the start of the agreement. If your car or van loses more value than expected throughout the loan, you can simply return the vehicle

Cons of PCP:

• Uncertain equity - If there is a negligible difference between the minimum future value and the vehicle's actual value at the end of the agreement, you will not have much equity to use as a deposit on another PCP deal

• You do not own the vehicle during the loan period – The car will not belong to you unless you decide to pay the final balloon payment at the end of the agreement

• Charges to the vehicle – Like the Personal Contract Hire agreement, a PCP agreement will include excess mileage and damage penalty fees. If you want to return the car at the end of the contract, you may have to pay fees if you exceed the mileage and damage conditions agreed upon at the beginning of the loan.

Pros of Hire Purchase:

• Flexible repayment terms (typically 12 to 60 months) to help fit around your monthly budget. However, the longer the term, the more you will pay in interest

• Relatively low deposit required (typically 10% of the car’s value)

• Fixed interest rates - you will know exactly what you will be paying each month for the length of the contract

• It does not usually come with mileage restrictions

• If your credit score is not that high it may be easier to get hire purchase than an unsecured loan, as the car is used as collateral for the loan

Cons of Hire Purchase:

• You don’t own the car until you’ve made your final payment, which means if you run into financial difficulties, the finance company could take the vehicle away

• You can’t sell or modify the vehicle over the agreement term without getting permission first

• It can be an expensive choice if you want a short-term agreement

• Until you’ve paid a third of the total amount payable, the financial provider can repossess the car without a court order

• Monthly payments can typically be higher than for PCP and Personal Contract Hire deals