You've found a car, and the dealer has offered you PCP or HP. Which one should you sign? It's a common choice, and it's simpler than the paperwork makes it look.
What's the difference between PCP and HP?
The main difference between PCP and HP is how you become the owner of the car: Hire Purchase (HP) spreads the full price across fixed monthly payments, so the car is yours once the last one clears and a small fee is paid, and Personal Contract Purchase (PCP) holds back a large part of the price as an optional balloon payment at the end, which keeps its monthly payments lower.
The trade-off is ownership. You'll only own a PCP car if you pay the balloon payment. So if you're planning to keep it for years, HP usually works out cheaper.
| Feature | PCP | HP |
|---|---|---|
| Who owns the car during the agreement | The lender | The lender |
| Monthly payments | Lower, because part of the price is deferred | Higher, because they repay the full price |
| Deposit | Often around 10%; no-deposit deals exist | Often around 10%; no-deposit deals exist |
| Final payment | Optional balloon, usually several thousand pounds | Small option-to-purchase fee |
| Ownership at the end | Only if you pay the balloon | Yes, once all payments and the fee are made |
| Annual mileage limit | Yes, with excess mileage charges | No |
| Condition check at the end | Yes, if you hand the car back | No, the car becomes yours |
| Total cost if you keep the car | Usually higher | Usually lower |
| Typical term | 24–48 months | 12–60 months |
| Choose your deposit and term | Yes, when you sign | Yes, when you sign |
| Early settlement | Yes | Yes |
| Secured on the car | Yes | Yes |
| Best for | Changing car every few years | Keeping the car, or driving high mileage |
What is Personal Contract Purchase (PCP)?
Personal Contract Purchase (PCP) is a car finance agreement made up of a deposit, fixed monthly payments and an optional balloon payment at the end. The lender owns the car until all of those are paid, so you'll need to clear the finance before you can sell it.
The balloon payment equals the car's Guaranteed Minimum Future Value (GMFV) – the lender's prediction of what the car will be worth when your agreement ends. It's based on the car, the contract length and your annual mileage, and it's fixed on the day you sign.
Your monthly payments only cover the gap between what you borrow and the GMFV, plus interest. That's why they're lower than HP payments on the same car.
At the end of a PCP, you have 3 options:
- Pay the balloon payment and keep the car. Some lenders let you refinance it rather than pay in one go.
- Hand the car back with nothing more to pay, as long as you're within your mileage limit and it passes its condition check.
- Part-exchange the car for a new one. If it's worth more than the balloon payment, that difference (called positive equity) goes towards your next deposit.
For more detail, see our guides to what happens at the end of a PCP and how to change your car before a PCP ends.
What is Hire Purchase (HP)?
Hire Purchase (HP) is a car finance agreement where, after a deposit, fixed monthly payments repay the car's full price plus interest. Once the last payment clears, the car is yours, with no large final sum to find.
There's one small charge at the end, the option-to-purchase fee, which transfers the car into your name. HP lenders often charge around £100 for it (some charge more).
HP has no mileage limit and no condition check, and lenders offer it on new and used cars, older ones included.
Example: the same car on PCP and HP
We ran the numbers on a £20,000 car, financed the same way on PCP and HP. Both agreements use the same deposit, amount borrowed, term and APR (annual percentage rate, the yearly cost of borrowing including interest and fees).
| PCP | HP | |
|---|---|---|
| Cash price | £20,000 | £20,000 |
| Deposit | £2,000 | £2,000 |
| Amount of credit | £18,000 | £18,000 |
| Term | 36 months | 36 months |
| APR | 9.9% | 9.9% |
| Monthly payment | £359.28 | £576.40 |
| Final payment | £9,000 optional balloon (GMFV) | £100 option-to-purchase fee |
| Total charge for credit | £3,934.11 | £2,850.47 |
| Total amount payable, including deposit | £23,934.11 | £22,850.47 |
PCP costs £217.12 less a month. Keep the car, though, and it costs £1,083.64 more in total.
Hand the PCP car back instead, and your total spend comes to £14,934.11. That's what driving it for the whole agreement costs you, with no balloon payment to find at the end.
These figures are illustrative, not a quote. Your APR depends on your credit history, the lender and the car.
Is PCP cheaper than HP?
Yes, PCP is cheaper each month, but HP usually costs less in total if you keep the car. Interest is the reason.
PCP and HP both lend you the car's price minus your deposit. What differs is how quickly that balance comes down.
HP payments clear the whole balance over the term. PCP payments only bring it down to the GMFV, so the balloon sits on the loan, gathering interest, until the end.
Picture a £20,000 car halfway through its agreement. You'd still owe £13,818 on PCP. On HP, that figure would be £9,636.
So PCP only works out cheaper if you never plan to buy the car. Hand it back or part-exchange it every few years, and you're paying for its depreciation plus interest, while the lender takes the risk that it's worth less than expected.
How else do PCP and HP differ?
PCP and HP also differ on deposit, mileage, damage, risk, contract length and ending early.
Who owns the car?
The lender is the legal owner on both PCP and HP until you've paid everything you owe. You're the registered keeper (the person named on the logbook) the whole time. HP hands ownership to you automatically after the last payment, but with PCP that only happens if you pay the balloon payment.
Do you need a deposit?
Yes, most PCP and HP deals start with a deposit, often around 10% of the car's price. The bigger it is, the less you borrow, and the lower your monthly payments.
No-deposit deals exist too, but they push your monthly payments up.
Are there mileage limits?
Yes, PCP has an annual mileage limit, but HP doesn't.
Your PCP limit is set when you sign, usually between 8,000 and 15,000 miles a year, because every extra mile lowers the GMFV. Go over it, and you'll pay an excess mileage charge of 5p to 30p a mile when you hand the car back. A thousand miles over would cost you £50 to £300.
HP has no limit at all, so it's usually the better fit if you drive a lot.
What happens if the car is damaged?
If you hand a PCP car back, the lender checks its condition against the industry's fair wear and tear standard. Anything beyond that, such as a dented bumper, is charged to you.
HP has no end-of-term condition check, because the car's yours. Neither does a PCP car you keep by paying the balloon payment.
Who carries the risk if the car loses value?
The lender carries most of the depreciation risk on PCP. If the car's worth less than the GMFV at the end, you can hand it back and the lender takes the loss.
HP works the other way round. The car's yours, so if it loses value faster than expected, that loss is yours too.
The flip side for PCP is equity, because you build none unless the car ends up worth more than the GMFV.
How long are the agreements?
PCP agreements usually run for 24 to 48 months. HP is more flexible, at 12 to 60.
You choose the term when you sign, and it stays fixed after that. A longer one means smaller monthly payments, but you'll pay interest for longer. And you can still settle early if things change.
Can you end the agreement early?
Yes, you can end a PCP or HP agreement early, either by settling or through voluntary termination. Settling means paying the settlement figure (the amount the lender says you owe today) and keeping the car.
Voluntary termination is a right under the Consumer Credit Act 1974. It lets you hand the car back once you've paid half the total amount payable. On PCP, the total includes the balloon payment, so you reach halfway much later.
Take a 3-year deal. HP usually gets you there around month 17 or 18. PCP can take until month 28 or later.
Handing the car back this way can still cost you, because the lender can charge for damage beyond fair wear and tear and, on PCP, for extra miles.
What happens if you miss payments?
Missing payments puts the car at risk on both PCP and HP, because each agreement is secured on it. The lender can add late fees and record a default on your credit file. Keep missing them, and the lender can take the car back.
If money's tight, call your lender before a payment is due. Lenders have to treat you fairly if you're in financial difficulty.
Is PCP or HP better for you?
HP is better if you want to own the car and keep it after the agreement ends. PCP suits you if you'd rather pay less each month and change car every few years.
Choose HP if you:
- want to own the car outright at the end
- plan to keep it for longer than the agreement
- drive high or unpredictable mileage
- are buying an older used car
- would rather avoid a large final payment
Choose PCP if you:
- want the lowest monthly payment on a newer car
- change car every 2 to 4 years
- want to change car without selling the old one yourself
- drive a predictable mileage each year
- want the option to hand the car back
- aren't sure yet whether you'll keep it
What if neither suits you?
A personal loan and leasing are the 2 main alternatives to PCP and HP. With a loan, you own the car from day one. Leasing, or Personal Contract Hire (PCH), works the opposite way, because the car always goes back at the end.
What to do next
If you're still undecided, we'd start with HP when you expect to keep the car beyond the end of the agreement. PCP makes more sense for a newer car you'll change within 3 or 4 years, as long as your mileage is predictable.
Before you sign, compare quotes on the total amount payable, and check the balloon payment you'd face at the end.
When you're ready, a car finance quote from Carplus searches our panel of lenders for deals you could be eligible for. We use a soft search, so there's no impact on your credit score.
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