PCP vs HP Car Finance UK: Which Is Right for You?
Most new cars in Britain are bought with finance, and the two most popular products -- Personal Contract Purchase (PCP) and Hire Purchase (HP) -- work very differently. Picking the wrong one can cost you hundreds a month. Here is the plain-English comparison.
What is PCP?
Personal Contract Purchase is built around low monthly payments. You pay a deposit, then fixed monthly payments over two to four years. Your payments only cover the car's depreciation plus interest -- not its full price.
At the end you have three choices: pay the balloon payment (Guaranteed Minimum Future Value, or GMFV) to keep the car; hand the car back and walk away; or use any value above the GMFV as a deposit on your next deal.
Two catches: PCP always has an annual mileage limit, commonly 6,000 to 15,000 miles, with excess charges of around 5 to 15 pence per mile. And you pay interest on the entire amount financed, including the balloon -- interest on money you may never borrow if you hand the car back.
What is HP?
Hire Purchase is simpler. You pay a deposit, then monthly instalments that repay the full price of the car plus interest, typically over 24 to 60 months. No balloon payment: once the final instalment clears, ownership transfers to you automatically.
HP monthly payments are higher because you are paying off the whole car. No mileage limits, no end-of-term condition rules. Like PCP, the lender owns the car until the final payment, so you cannot sell it before settling the finance.
The key differences
Monthly cost: PCP is lower (depreciation only); HP is higher (full price).
Ownership: HP ownership is automatic at the end; PCP ownership needs the balloon payment.
End of term: PCP offers return, buy or trade-in; HP simply ends with ownership.
Mileage and condition: PCP has limits and fair-wear rules; HP has none.
Total interest: PCP often costs more overall, because interest is charged on the balloon too.
A worked example: a 20,000 pound car with a 2,000 pound deposit might cost roughly 430 pounds a month on HP over 48 months (then you own it), versus near 270 pounds a month on PCP with an 8,000 pound GMFV -- plus 8,000 pounds at the end to keep it. (Illustrative only.)
Ask about the commission
Dealer finance is convenient but not automatically cheapest. Dealers earn commission for arranging finance; the FCA banned discretionary commission arrangements, which let dealers raise your rate to raise their commission, in January 2021. A Supreme Court ruling on 1 August 2025 confirmed undisclosed commission does not automatically make an agreement unlawful, but very large undisclosed commissions can still make the relationship unfair under the Consumer Credit Act 1974. Before signing, ask the dealer how much commission they receive and compare their APR with a bank loan or broker quote.
Your early-exit rights
Both PCP and HP are regulated credit agreements. You can withdraw within 14 days of signing, settle early at any point for a settlement figure, or use voluntary termination: once you have paid half of the total amount payable (deposit, monthly payments and any balloon, plus arrears), you can hand the car back and walk away. Once you have paid a third, the lender needs a court order to repossess. To see what settling your deal costs today, try https://drivepedia.site/tools/pcp-settlement
Which one suits you?
Choose PCP for the lowest monthly payment, swapping cars every two to four years, predictable mileage, and no need to own the car. It works best on cars that hold their value, because a strong GMFV cuts your monthly payments.
Choose HP to own the car, for high or unpredictable mileage, keeping cars five years or more, or a fixed finish date with no return inspection. It is often the better value used: a used https://drivepedia.site/car/ford-focus-2019 or https://drivepedia.site/car/vw-golf-2020 on HP can cost less per month than many new-car PCP deals, while a popular runabout like the https://drivepedia.site/car/vauxhall-corsa-2024 suits either product depending on your deposit.
Whichever you choose, compare the APR -- not just the monthly payment -- and check the assumptions on mileage, condition and the balloon payment. The cheapest monthly figure is rarely the cheapest deal. (General information, not financial advice.)
Frequently asked questions
Is PCP or HP cheaper overall?
HP is usually cheaper overall: interest is charged on a shrinking balance and there is no balloon. PCP is cheaper per month, but you pay interest on the balloon too.
Do I own the car on PCP?
Not unless you pay the balloon payment. Until then the finance company owns it.
What happens if I exceed the mileage limit on PCP?
You pay an excess charge, typically 5 to 15 pence per mile, at the end of the agreement.
Can I end a PCP or HP deal early?
Yes: settle early for a settlement figure, or use voluntary termination once you have paid half of the total amount payable. You also have a 14-day withdrawal right after signing.
Is dealer finance the cheapest option?
Not always. Compare the dealer's APR with a bank loan or an independent broker's quote before you sign.
Does car finance affect my credit score?
Both are on your credit file. Keeping up payments builds your score; missed payments damage it.