Hire Purchase (HP) and Personal Contract Purchase (PCP) are the two most popular types of car finance 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 HP vs PCP car finance guide breaks down exactly how each one works, what you will actually pay, and which is the better fit for your situation.
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.
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.
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.
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.
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.
This is where PCP gets interesting. At the end of your agreement, you have three options:
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.
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.
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.
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.
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.
If you want to sell a car that is still on PCP before the agreement ends, our guide to selling a car on finance explains how the process works, including what happens with positive and negative equity.
Here is a side-by-side breakdown of how HP and PCP 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 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 |
Numbers talk louder than explanations. Here is a side-by-side HP vs PCP example based on a £15,000 used car, with a £1,500 deposit, financed over 3 years at 9.9% APR. You can use a PCP vs HP calculator to run your own figures, but this gives you a clear picture of the difference.
Car price: £15,000
Deposit: £1,500
Amount financed: £13,500
Monthly payment (36 months): £436
Balloon payment: £0
Total payable: £17,196
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
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.
There is no single answer to which is better, PCP or HP - it depends on how you drive, what you value, and what you can afford each month. Here are two common scenarios.
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.
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.
When comparing PCP vs HP vs personal loan, it is worth knowing there is a third route. 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.
Leasing (also called Personal Contract Hire) is another option, but it works differently to all three. With a lease, you are renting the car for a fixed period and never own it - there is no option to buy at the end. Monthly payments can be competitive, but you will always hand the car back and have nothing to show for it. For most buyers who want the option of ownership, HP, PCP, or a personal loan will be the better fit.
For a more detailed look at all three finance options, see our complete guide to how car finance works.
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.
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Compare Car Finance via BrumbleYes, it is possible with both. HP can sometimes be easier to get approved for, especially if it is a lower total amount of credit. 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. All credit is subject to status.
Not always. Some lenders offer zero-deposit options on both HP and PCP deals. However, putting down a deposit 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.
With HP, your monthly payments cover the full value of the car. With PCP, they only cover the depreciation - the difference between what the car is worth now and what it is predicted to be worth at the end. That means HP spreads a larger amount across the same number of months. However, HP is often cheaper in total because you do not pay interest on a balloon payment amount, and you own the car at the end without any further lump sum.
PCP is not a rip-off, but it is often misunderstood. The lower monthly payments can make it look cheaper than it is, because the balloon payment at the end is easy to overlook. If you plan to keep the car, you will often pay more in total with PCP than with HP, because you are paying interest on the balloon amount throughout the agreement. PCP works well if you want flexibility and lower monthly costs, but it is important to look at the total amount payable, not just the monthly figure. Our worked example above shows the real difference.
At the end of a PCP agreement (typically 2 to 4 years), you have three choices. You can hand the car back and walk away with nothing more to pay, as long as it is within the agreed mileage and in fair condition. You can pay the balloon payment (the Guaranteed Minimum Future Value) to own the car outright. Or, if the car is worth more than the balloon, you can use that positive equity as a deposit on your next car. If you want to sell privately instead, our selling a car on finance guide explains how.
You do. Even though the finance company technically owns the car, you are responsible for keeping it in good condition, serviced, and roadworthy throughout the agreement. You also need to keep it insured. If you hand the car back at the end, the finance company will inspect it and may charge for damage beyond normal wear and tear - so keeping on top of maintenance is important. Routine servicing, tyres, and MOT costs are all your responsibility.
A larger deposit reduces the amount you borrow, which means lower monthly payments and less interest overall. On PCP specifically, a bigger deposit also reduces the gap between what you owe and what the car is worth, making it less likely you will end up in negative equity. However, there is a balance - putting down a very large deposit on a PCP means more of your cash is tied up in an asset you might hand back at the end. If you are confident you will keep the car, a bigger deposit makes more sense.
It can be, depending on your situation. You have the right to settle any car finance agreement early by paying a settlement figure to the lender. If you have come into money or your circumstances have changed, early settlement means you stop paying interest sooner. However, with PCP you would need to pay the remaining balance including the balloon payment to take ownership, so make sure the total makes sense compared to the car's current value. If the car is worth more than the settlement, you could settle and then sell it to keep the equity.
Not directly. PCP and HP are separate agreements, so you cannot simply convert one to the other. What you can do is settle your existing PCP agreement early (by paying the settlement figure) and then take out a new HP agreement on the same car, or sell the car and start fresh with HP on a different vehicle. Whether this is worthwhile depends on the settlement amount, the car's value, and the HP rate you could get. Checking your eligibility via Brumble is a good starting point.
Yes, both types of agreement can be settled early. You will need to contact your lender to get a settlement figure. 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, settling early can sometimes result in negative equity if the car has lost value faster than expected.
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. 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.
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 asking for a higher mileage limit upfront or considering HP instead. Our annual mileage calculator can help you work out a realistic figure.
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 and start a new deal, the total cost comparison is different as you are paying for the use of the car rather than buying it outright.
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.
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. If you are looking to keep your overall motoring costs down, our guide to lowering your car insurance premium covers practical ways to save.
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