PCP vs HP: What is the Difference?

What's the Difference Between HP and PCP?

Personal Contract Purchase (PCP) and Hire Purchase (HP) are the two most popular ways to finance a car in the UK. Both let you spread the cost into monthly payments, but they work quite differently, cost different amounts, and suit different people. This guide breaks down exactly how each one works, what you will actually pay, and which is the better fit for your situation.

Hire Purchase Own the car at the end

Personal Contract Purchase Flexibility at the end

In this guide

How Hire Purchase (HP) works
How Personal Contract Purchase (PCP) works
PCP vs HP: The full comparison
Worked example: What you would actually pay
Which is right for you?
What about a personal loan?
How to check your eligibility
Frequently asked questions

91% of UK car buyers use some form of finance

30 to 40% lower monthly payments with PCP vs HP (typical)

£23bn lent on used cars in the UK each year

How Hire Purchase (HP) works

Hire Purchase is the most straightforward type of car finance. You borrow the full cost of the car (minus any deposit you put down) and repay it in fixed monthly amounts over an agreed term - typically between one and five years. Once you make the final payment, plus a small option-to-purchase fee (usually around £1 to £10), the car is officially yours.

Think of it like a mortgage on a house. Every payment you make goes towards actually owning the car. There is no surprise lump sum at the end and no limits on how many miles you can drive.

How the payments break down

When you take out an HP agreement, you will typically pay an initial deposit (often around 10% of the car's value, though some lenders offer zero-deposit options). The remaining amount - plus interest, shown as an Annual Percentage Rate (APR) - is split into equal monthly payments across your chosen term. The interest rate you are offered will depend on your credit history, the amount you are borrowing, and the length of the agreement.

Key thing to know about HP

You do not legally own the car until the final payment is made. During the agreement, the finance company is the legal owner and the car acts as security for the loan. If you fall behind on payments, the lender could take the car back - though once you have repaid more than a third of the total amount, they would need a court order to do so.

Pros and cons of HP

On the plus side: you own the car outright when you are done paying, there are no mileage limits or condition charges, monthly payments stay fixed so you always know where you stand, and it is available on both new and used cars of any age.

On the downside: monthly payments are higher than PCP because you are paying off the full value of the car, you may need a larger deposit, and if you like changing cars every couple of years, you will need to sell privately or part-exchange rather than simply handing the keys back.

How Personal Contract Purchase (PCP) works

PCP is a more flexible type of car finance. Instead of paying off the car's entire value, your monthly payments only cover the car's depreciation - the difference between what it is worth when you take out the agreement and what it is expected to be worth at the end. This remaining predicted value is called the Guaranteed Minimum Future Value (GMFV), and it is where the "balloon payment" comes from.

Because you are only financing the depreciation rather than the whole car, monthly payments on PCP are typically 30 to 40% lower than HP for the same vehicle.

What happens at the end of a PCP deal?

This is where PCP gets interesting. At the end of your agreement, you have three options:

Option 1 - Hand the car back. If you do not want to keep it, you simply return it to the lender and walk away. As long as the car is within the agreed mileage and in fair condition, there is nothing more to pay.

Option 2 - Pay the balloon payment and keep the car. The GMFV becomes a final lump sum you can pay to own the car outright. This can be thousands of pounds, so it is important to plan ahead if ownership is your goal.

Option 3 - Use any equity towards a new deal. If the car is worth more than the GMFV (meaning you have looked after it well and stayed within the mileage), you could have positive equity. That difference can be used as a deposit on your next car.

Watch out for mileage and condition charges

PCP agreements set a pre-agreed annual mileage limit, typically between 6,000 and 15,000 miles. If you go over it, you will pay an excess mileage charge - usually between 5p and 15p per mile. You are also expected to return the car in fair condition. Anything beyond normal wear and tear (dents, scratches, interior damage) could result in extra charges.

Pros and cons of PCP

On the plus side: lower monthly payments make newer or higher-spec cars more affordable, you get flexibility at the end of the deal (keep, return, or upgrade), and the GMFV protects you if the car's market value drops below the predicted amount.

On the downside: you do not own the car unless you pay the balloon payment, mileage limits and condition charges can catch you out, you pay interest on the full financed amount (including the balloon) even if you hand the car back, and ending a PCP deal early can sometimes lead to negative equity.

PCP vs HP: The full comparison

Here is a side-by-side breakdown of how PCP and HP differ across every factor that matters when choosing your car finance.

	Hire Purchase (HP)	Personal Contract Purchase (PCP)
What you are paying for	The full value of the car, plus interest	The car's depreciation only, plus interest
Monthly payments	Higher - you are paying off everything	Lower - typically 30 to 40% less than HP
Deposit required	Usually 10%+ (some £0 options exist)	Usually 10%+ (some £0 options exist)
Typical term length	12 to 60 months	24 to 48 months
Own the car at the end?	✔ Yes - automatically after final payment	● Optional - only if you pay the balloon
Balloon / final payment	✔ None - just a small option-to-purchase fee	✘ Yes - can be thousands of pounds
Mileage limits	✔ No limits - drive as much as you like	● Pre-agreed - excess charges apply (5 to 15p/mile)
New and used cars?	✔ Both - any age	● Mostly newer - usually under 4 years old
End-of-deal options	Keep or sell/part-exchange	Hand back, keep (pay balloon), or use equity on next deal
Total cost over the full term	Often cheaper overall if you plan to keep the car	Can cost more in total due to interest on the balloon amount
Good for bad credit?	✔ Potentially - credit is subject to status	● Depends - some lenders require stronger credit
Early settlement	Possible - pay settlement figure to lender	Possible - but risk of negative equity
Best for	Keeping the car long-term, high mileage, used cars	Changing cars regularly, lower monthly budget, newer cars

Worked example: What you would actually pay

Numbers talk louder than explanations. Here is a side-by-side example based on a £15,000 used car, with a £1,500 deposit, financed over 3 years at 9.9% APR.

📅 Hire Purchase (HP)

Car price £15,000

Deposit £1,500

Amount financed £13,500

Monthly payment (36 months) £436

Balloon payment £0

Total payable £17,196

📄 PCP

Car price £15,000

Deposit £1,500

GMFV (predicted future value) £6,000

Monthly payment (36 months) £272

Balloon to keep the car £6,000

Total payable (if you keep it) £17,292

What does this tell us?

PCP's monthly payments are £164 less per month in this example - a meaningful difference for many budgets. But if you plan to keep the car, the total cost ends up very similar. The difference is cashflow: HP costs more each month but you own the car automatically. PCP costs less monthly but you will need a £6,000 lump sum at the end if you want to keep it. These are illustrative figures. The actual rate you are offered will depend on your personal circumstances and credit history.

Which is right for you?

There is no single "better" option - it depends on how you drive, what you value, and what you can afford each month. Here are two common scenarios.

HP is likely better if...

You want to keep the car

You plan to keep the car for several years
You drive a lot of miles
You want to modify the car without restrictions
You prefer a simple deal - pay it off, it is yours
You are buying a used or older car
You would rather pay more monthly than face a big lump sum later

PCP is likely better if...

You want flexibility

You like changing cars every 2 to 4 years
Lower monthly payments are important to you
You drive a moderate number of miles each year
You want to drive a newer or higher-spec car
You are not sure if you will want to keep the car long-term
You would like the option to walk away at the end

What about a personal loan?

It is worth knowing there is a third option. A personal loan lets you buy the car outright from day one - you own it the moment the money changes hands, because the loan is not secured against the car.

If you have a strong credit score, personal loan rates can sometimes be lower than car finance APRs. You will also avoid mileage limits, condition charges, and any restrictions on what you do with the car. The trade-off is that you will usually need good credit to get a competitive rate, and the monthly payments can be similar to HP since you are repaying the full amount.

A personal loan can make sense if you are buying privately (where HP and PCP are usually not available) or if you simply want the peace of mind that comes with outright ownership from the start. For a more detailed look at all three options, see our complete guide to how car finance works.

How to check your eligibility

Before you commit to any type of car finance, it is worth checking what you are actually eligible for. The interest rate and terms you are offered will depend on your individual circumstances - including your credit history, income, and how much you want to borrow.

1 Check eligibility
Quick form, no impact on your credit score

2 See your options
HP and PCP deals matched to you

3 Choose your deal
Compare rates, terms and monthly payments

4 Drive away
Paperwork handled, car finance sorted

Not sure which car finance suits you?

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Frequently asked questions

Can I get PCP or HP with bad credit?

Yes, it is possible with both. HP can sometimes be easier to get approved for especially if its a lower total amount of credit, which reduces lender risk. Some lenders specialise in bad credit car finance and will look at your current income and affordability rather than focusing only on your credit history. Checking your eligibility through a soft search (which does not affect your credit score) is a good first step to see what is available to you. Remember all credit is subject to status.

Do I need a deposit for PCP or HP?

Not always. Some lenders offer zero-deposit options on both HP and PCP deals. However, putting down a deposit - even a small one - will reduce the amount you need to borrow, which lowers your monthly payments and the total interest you pay. If you have a car to trade in, its value can often be used as your deposit.

Can I end my HP or PCP deal early?

Yes, both types of agreement can be settled early. You will need to contact your lender to get a settlement figure - this is the amount needed to pay off the remaining balance. Under the Consumer Credit Act, you also have a right called "voluntary termination" once you have paid at least 50% of the total amount payable. With PCP, be aware that settling early can sometimes result in negative equity if the car has lost value faster than expected.

What is a balloon payment?

A balloon payment is the optional final lump sum at the end of a PCP agreement. It is based on the Guaranteed Minimum Future Value (GMFV) of the car - the amount the lender predicts the car will be worth when your deal ends. If you want to keep the car, you pay the balloon. If not, you can hand the car back or use any equity as a deposit on your next car. HP agreements do not have a balloon payment.

What happens if I go over my PCP mileage limit?

If you go over the pre-agreed mileage on a PCP deal, you will pay an excess mileage charge when you return the car. This is typically between 5p and 15p per mile. On a 3-year deal, driving 2,000 miles over your annual limit could cost you £300 to £900 at the end. If you know you will be driving a lot, it is worth either asking for a higher mileage limit upfront (which will increase your monthly payments slightly) or considering HP instead, which has no mileage restrictions. Our guide on average miles driven per year in the UK can help you work out a realistic figure.

Is HP or PCP cheaper overall?

If you plan to keep the car, HP is often cheaper overall because you avoid the interest charged on the balloon payment amount in a PCP deal. However, PCP is cheaper month-to-month, which can make it easier to manage for your budget. If you plan to hand the car back at the end of a PCP deal and start a new one, the total cost comparison is different - you are essentially paying for the use of the car rather than buying it outright.

Can I get car finance if I am self-employed?

Yes. Many lenders offer car finance to self-employed applicants. You may need to provide bank statements, tax returns, or other proof of income rather than payslips. Some lenders are more flexible than others, so comparing offers through a broker can help you find deals suited to your situation.

What does APR mean?

APR stands for Annual Percentage Rate. It is the total cost of borrowing shown as a yearly percentage, including interest and any fees. A lower APR means you will pay less in total for your car finance. The APR you are offered depends on your credit score, the amount you are borrowing, and the lender's rules. Representative APR is what at least 51% of successful applicants will get - you might be offered a different rate based on your personal circumstances. If you are looking to keep your overall motoring costs down, our guide on how to lower your car insurance premium covers practical ways to save.

Ready to see what car finance you could get?

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