PCP vs HP Car Finance UK: Which Is Better?

PCP vs HP: Which Car Finance Is Better in the UK? If you're buying a car on finance in the UK, you'll almost certainly be offered two options: HP (hire purchase) and PCP (personal contract purchase). They look similar on the surface — a deposit followed by fixed monthly payments — but they work very differently, and choosing the wrong one can cost you thousands of pounds. This guide explains both, with real numbers, so you can decide with confidence. What Is HP (Hire Purchase)? Hire purchase is the simplest and oldest form of car finance. You pay a deposit — usually around 10% of the car's price — then fixed monthly payments over 2 to 5 years. Once you've made the final payment, plus a small "option to purchase" fee (typically between £1 and £10), the car is yours outright. There are no mileage limits, no inspections, and no surprises at the end. The car is registered to you from day one (though the finance company owns it until the final payment), and when the agreement ends, you simply keep it. What Is PCP (Personal Contract Purchase)? PCP also starts with a deposit and monthly payments, but the monthly figure is noticeably lower. That's because you're not paying off the whole car — you're only paying off its expected depreciation. At the start of the agreement, the lender sets a Guaranteed Future Value (GFV), sometimes called the balloon payment. This is their prediction of what the car will be worth when the term ends, usually after 2 to 4 years. When the term ends, you get three choices: 1. Hand the car back and walk away. As long as you've stayed within the agreed mileage and the car is in reasonable condition, you owe nothing more. 2. Part-exchange it for another car. If the car is worth more than the GFV, the difference (the "equity") becomes the deposit on your next deal. 3. Pay the GFV — the balloon payment — in one lump sum and keep the car. Monthly Costs: A Real Example Take a £20,000 car over 3 years with a £2,000 deposit. The exact numbers depend on the interest rate, but roughly: - HP: you're financing £18,000, so monthly payments might be around £540 to £580. - PCP: with a GFV of, say, £10,000, you're only financing £8,000 plus interest, so monthly payments might be around £270 to £320. PCP looks far cheaper month to month — and it is, while the agreement runs. But remember what happens at the end: on HP you own a car worth roughly £10,000 to £12,000, while on PCP you own nothing unless you find another £10,000 for the balloon payment. Deposits Both HP and PCP typically ask for around 10% upfront, though PCP deals are often advertised with low or even £0 deposits. A bigger deposit lowers your monthly payments on both types — and on PCP it also reduces the total interest you pay, because interest is charged on the amount financed. Mileage Limits and Condition (PCP Only) This is the biggest practical difference. PCP agreements include an annual mileage limit — 8,000 miles a year is typical, sometimes 10,000. If you exceed it and hand the car back, you'll pay excess mileage charges, usually 7p to 12p per mile. Ten thousand extra miles could cost you £700 to £1,200. The car must also be returned in reasonable condition. Damage beyond normal fair wear and tear — kerbed alloys, dented panels, stained seats — will be charged when the car is inspected. HP has none of this. Drive as many miles as you like; nobody inspects the car at the end, because it's yours. Who Should Choose HP? - You plan to keep the car for many years after the finance ends. - You drive high or unpredictable mileage. - You want to own the car outright with no final lump sum to find. - You prefer the simplest possible agreement with no end-of-term decisions. Who Should Choose PCP? - You like changing your car every 2 to 4 years anyway. - Lower monthly payments matter more to you than eventual ownership. - Your annual mileage is predictable and comfortably within the limit. - You value the GFV safety net: if the car depreciates more than expected, that's the lender's problem, not yours — provided you hand it back. Ending the Agreement Early: Voluntary Termination Both HP and PCP are regulated by the Consumer Credit Act, which gives you a valuable right: once you have repaid 50% of the total amount payable (including interest, fees and the deposit — not just half the monthly payments), you can voluntarily terminate the agreement and hand the car back. The car must be in reasonable condition and your payments up to date. This applies to PCP too, which many drivers don't realise. Check your agreement for the exact halfway figure. Frequently Asked Questions Is PCP cheaper than HP overall? The monthly payments are lower, but the total cost depends on what you do at the end. If you pay the balloon payment and keep the car, PCP often costs slightly more overall because you're financing over a longer effective period. If you hand the car back, you've simply paid for 2-3 years of motoring — which can be good value. Can I sell a car on HP or PCP? Not without settling the finance first. The finance company owns the car until the agreement ends. You can usually get a settlement figure and pay it off early, then sell the car yourself. Does PCP affect my credit score? Both HP and PCP are credit agreements and appear on your credit file. Missed payments damage your score on either type; a well-managed agreement builds it. What happens if my PCP car is worth less than the GFV? Nothing — that's the point of the "guaranteed" in Guaranteed Future Value. Hand it back and the shortfall is the lender's loss, as long as mileage and condition terms are met. The Bottom Line Choose HP if you want to own your car and drive without limits. Choose PCP if you want the lowest monthly payment, change cars regularly, and are happy to hand the keys back or find a balloon payment at the end. Either way, read the agreement carefully — especially the mileage limit, the GFV, and the total amount payable — before you sign.