PCP vs. HP: Which Car Finance Deal is Right for You?
A detailed guide comparing PCP vs. HP car finance in the UK. Understand the pros, cons, costs, and discover which option is best for owning or changing your car.
Choosing a new car is exciting, but navigating the world of finance can be confusing. Two terms you'll hear constantly are PCP and HP. These are the two most popular ways to finance a car in the UK, but they work in very different ways and lead to very different outcomes. Understanding this difference is crucial to making a smart financial decision that suits your budget and your long-term goals.
At Plouta, we believe in empowering you with the knowledge to make confident financial choices. This guide will demystify Personal Contract Purchase (PCP) and Hire Purchase (HP), breaking down the pros and cons of each, explaining the costs, and helping you decide which path is the right one for you.
What You Will Learn in This Guide ⤵
What is HP? Understanding the straightforward path to ownership.
What is PCP? Exploring the flexible option with lower monthly payments.
The Key Differences: A head-to-head comparison of costs, ownership, and restrictions.
A Detailed Comparison Chart: An at-a-glance summary.
Who Each Plan is Best For: Matching a finance deal to your lifestyle and goals.
Tips for Saving Money: How to get the best deal, whichever you choose.
Hire Purchase (HP): The Simple Path to Ownership
A Hire Purchase (HP) agreement is a straightforward way to buy a car over time. Think of it like a mortgage for your car.
How it works:
You pay an initial deposit (typically 10% or more).
You then pay off the entire remaining value of the car in fixed monthly instalments over a set period (usually 2-5 years).
Once you make the final payment (plus a small "option to purchase" fee, often £100-£200), the car is legally yours.
The loan is secured against the car, meaning if you fail to make payments, the finance company can repossess it.
Personal Contract Purchase (PCP): The Flexible, Lower-Payment Option
PCP has become the most popular way to finance a new car in the UK, accounting for the vast majority of deals. It offers greater flexibility and lower monthly payments.
How it works:
You pay an initial deposit.
Your monthly payments are much lower because you are not paying off the full value of the car. Instead, you are primarily funding its depreciation the amount of value the car is predicted to lose over the term of the contract.
At the end of the term (usually 3-4 years), you have three options:
Pay the "Balloon Payment": Pay a large, final lump sum (the Guaranteed Minimum Future Value, or GMFV, agreed at the start) to own the car outright.
Hand it Back: Simply return the car to the dealer and walk away with nothing more to pay (provided you've stuck to the mileage and condition terms).
Part-Exchange: If the car is worth more than the GMFV (this is called having "equity"), you can use that equity as a deposit for a new PCP deal on a new car.
The Key Differences: PCP vs. HP
1. The Monthly Payments:
PCP: Lower monthly payments, because you are only covering the car's depreciation.
HP: Higher monthly payments, because you are paying off the car's entire value.
2. The End of the Agreement:
PCP: You have three choices pay the large balloon payment to own it, hand it back, or part-exchange.
HP: You make the final payment and you automatically own the car. There are no other choices or large balloon payments.
3. Ownership:
PCP: You are effectively hiring the car. You only become the owner if you choose to make the final balloon payment.
HP: You are buying the car from day one, but it only becomes legally yours after the final payment.
4. Restrictions:
PCP: Comes with strict terms. You will agree to an annual mileage limit (e.g., 10,000 miles per year). Exceeding this results in a penalty charge per mile. You must also keep the car in good condition to avoid "wear and tear" charges when you hand it back.
HP: No mileage limits or wear and tear charges. Because you are on a path to owning it, you can drive as much as you like.
| Feature | PCP (Personal Contract Purchase) | HP (Hire Purchase) |
|---|---|---|
| Primary Goal | Flexible use of a newer car with lower monthly outgoings. | To own the car outright at the end of the term. |
| Monthly Payments | Lower | Higher |
| Deposit | Yes, typically 10%+. | Yes, typically 10%+. |
| End of Term | 3 options: Pay balloon to own, hand back, or part-exchange. | You make the final payment and own the car. |
| Final Payment | Large optional "balloon payment" (GMFV). | Small "option to purchase" fee. |
| Ownership | You only own it if you pay the balloon payment. | You own it automatically after the final payment. |
| Mileage Limits | Yes, with penalties for exceeding them. | No. |
| Wear & Tear | Yes, charges apply for damage beyond fair wear and tear. | No (it's your car to maintain). |
| Best For... | People who like to change cars every few years and prefer lower monthly costs. | People who want to keep their car for a long time and value eventual ownership. |
Who is Each Plan Best For?
You should consider a PCP deal if:
You like driving a new or nearly new car every 3-4 years.
Lower monthly payments are a priority for your budget.
You are confident you can stick to an agreed mileage limit.
You don't want the hassle of selling the car yourself at the end of the term.
You should consider an HP deal if:
Your ultimate goal is to own the car and be payment-free at the end.
You plan to keep the car for a long time (5+ years).
You drive high mileage and don't want to worry about restrictions.
You prefer the simplicity of a straightforward purchase plan.
Tips for Saving Money on Car Finance
Improve Your Credit Score: A better credit score will give you access to lower interest rates (APRs), saving you hundreds or thousands over the term.
Save a Bigger Deposit: The more you put down upfront, the less you have to borrow, which reduces both your monthly payments and the total interest you'll pay.
Negotiate on the APR: Don't just negotiate the car's price; try to negotiate the interest rate (APR) as well. Ask the dealer if they can beat a rate you've seen elsewhere.
Look for Deposit Contributions: Manufacturers often offer "deposit contributions" on new cars, where they put a few thousand pounds towards your deposit to make the deal more attractive.
Be Realistic with Mileage (PCP): Don't get caught out by excess mileage charges. Be honest about your annual mileage. It's better to pay a few pounds more per month for a higher mileage allowance than to face a large penalty at the end.
Know Where You Stand: Take the Plouta Financial Wellness Survey
Taking our Financial Wellness Survey is a great first step. It will help you reflect on your habits and identify the key areas to focus on in your journey towards financial freedom.
Conclusion: Ownership vs. Flexibility
The choice between PCP and HP boils down to a simple question: Do you want to own the car in the long run, or do you prefer the flexibility of changing cars regularly with lower monthly payments?
HP is a simple, traditional loan that leads to ownership. PCP is more like a long-term rental with the option to buy at the end. While PCP deals are incredibly popular due to their affordability, they require you to be mindful of mileage and condition. An HP agreement gives you more freedom but demands higher monthly payments.
By understanding your own priorities and using the tips in this guide, you can confidently choose the finance deal that puts you in the driver's seat of your finances.
Get one-to-one financial advice
We’ll find a financial adviser perfectly matched to your needs. Getting started is easy, fast and free.
Disclaimer: This guide provides general information about UK car finance options and is for informational purposes only. It does not constitute financial advice. The suitability of any finance product depends on your individual circumstances and credit status. Always read the terms and conditions carefully and compare APRs to understand the total cost of borrowing before entering into any agreement. Your vehicle may be at risk if you do not keep up with repayments.