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In this article we’ll help you understand the difference between paying for a new car using cash, via Contract Hire, PCP, HP and other methods of purchase.
When buying a new car, you’re often faced with a choice of paying with cash or using one of a number of different ways to finance the purchase.
Whichever method you choose, there’s a GAP insurance policy appropriate for you. GAP insurance is available for new and used vehicles up to eight years old at the time of purchase.
How do these payment types work?
To begin with, let’s look at the principal differences…
Cash
In the past, a straightforward cash purchase always used to secure the best discount on a new car, particularly when there was no part-exchange to take into account. You can still get a good discount from the dealer as a cash buyer, but many manufacturers offer further incentives (deposit allowance/ contribution) if you opt to finance the vehicle via a PCP.
Suitable GAP insurance type: Invoice or (for brand-new vehicles at first registration) Replacement.
PCP (Personal Contract Purchase)
A PCP is a type of loan to help you buy your car. The monthly payments tend to be lower than with a simple Hire Purchase agreement, but there’s a large balloon payment at the end of the contract, also referred to as the Guaranteed (Minimum) Future Value.
If you pay the balloon payment, the car becomes yours. Alternatively, you can use the trade-in vehicle as down-payment towards a new PCP on a new car, or you can simply hand the car back and walk away. See Negative Equity.
Suitable GAP insurance type: Invoice or (for brand-new vehicles at first registration) Replacement.
HP (Hire Purchase)
After paying an initial deposit, an HP agreement divides the loan into equal instalments, spreading the cost of the purchase. At the end of the term, the car is yours – unlike with a PCP, there’s no balloon payment, but the monthly payments tend to be higher as a result.
Suitable GAP insurance type: Invoice or (for brand-new vehicles at first registration) Replacement.
Lease Purchase
Lease Purchase contracts are similar to HP, but the monthly instalments tend to be lower and there is a balloon payment at the end. Unlike a PCP, however, the balloon payment must be made – you can’t hand the car back and walk away. There’s sometimes an option to extend the contract by making additional monthly payments or refinancing the vehicle to cover the balloon payment.
Suitable GAP insurance type: Invoice or (for brand-new vehicles at first registration) Replacement.
Contract Hire / Lease Hire
Contract Hire is a long-term rental that may be suitable if you do not want to purchase the car at the end of the agreement. The car remains the property of the leasing company from start to finish (they retain the logbook (V5C) and they are the vehicle’s registered owner and keeper throughout).
Leasing contracts were traditionally limited to company vehicles, but PCH (Personal Contract Hire) is growing in popularity with private individuals.
Suitable GAP insurance type: Contract Hire.
*Invoice GAP insurance policies are available for most new and used vehicles up to eight years old, purchased within the last 3 months. Replacement GAP insurance policies are available for most brand-new vehicles purchased within the last 30 days. Contract Hire GAP insurance policies are available for vehicles with 12 months or more remaining on the lease. Not all vehicles are eligible for GAP insurance. Please see a list of excluded vehicles here. Other restrictions apply.
 
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