PCP (Personal Contract Plan) or hire purchase: how car finance works and what it costs

A Personal Contract Plan (PCP) costs less a month than hire purchase because of a big final payment. How they compare, handing a car back and the rate cap.

Most new cars in Ireland are bought on hire purchase (HP) or a Personal Contract Plan (PCP), which is a type of hire purchase. In both, the finance company owns the car until you make the last payment. The difference is in how the payments are spread.

Hire purchase

You pay a deposit and then equal monthly instalments, usually over two to five years and most often three. When the last one is paid, the car is yours. There is no large payment at the end.

PCP

You pay a deposit and lower monthly instalments, usually over three years, then a large final payment, sometimes called the guaranteed minimum future value. At the end you choose to pay it and keep the car, or hand the car back. Many people trade it in for a new PCP. PCPs come with mileage limits and servicing conditions, and charges if you exceed them.

Comparing the cost

Take a €35,000 car with a €7,000 deposit, over 36 months at an example rate of 6.9% a year. The PCP final payment is €14,000:

The PCP costs less each month but more in total, because more of the debt stays outstanding for longer and you pay interest on it. To compare offers, look at the total hire purchase price against the cash price. Since 16 May 2022, the annual percentage rate (APR) on a hire purchase agreement can't exceed 23%.

Ending early: the half-rule

You can end any hire purchase agreement, including a PCP, at any time by writing to the finance company. If you hand the car back, you owe up to half the total hire purchase price, less what you have paid. In the example, you reach half after 14 months on HP, but only after 25 months on the PCP. Its large final payment counts in the total.

If you return the car, make sure the paperwork says 'statutory termination' (ending it under your legal right), not 'voluntary surrender'. That can be calculated differently. Photograph the car first: you can be charged if it hasn't been looked after.

Other points

• You have 10 days after receiving the agreement to withdraw. You don't have to sign a waiver of that right.
• You can't sell the car until the agreement is paid off.
• HP and PCP agreements appear on your credit report.
• A credit union or bank loan makes you the owner from day one, which can suit people who keep cars for a long time.

Work it out

• PCP or HP: check your car finance quotes →
• Lease a car or buy one? →
• Plan to clear your debts →

Sources

General information, not tax advice. HeyPenny is not a tax agent.