Compare PCP and HP Finance: Key Differences Explained

Deciding Between PCP and HP Car Finance

Car finance can be complex, but understanding your options is vital before committing to a significant purchase. Personal Contract Purchase (PCP) and Hire Purchase (HP) are two of the most common routes for UK consumers. Here, we outline their differences so you can choose with confidence.

Who Should Read This?

If you are considering financing a new or used car in the UK and want to weigh your options between PCP and HP, this guide is for you. Whether you value flexibility or plan to own the car outright, understanding both products will help you make an informed decision.

Key Concepts: PCP vs HP in Plain English

PCP (Personal Contract Purchase):

• You pay a deposit (usually 10%+), then monthly instalments over 2–4 years.

• At the end, you can pay a final ‘balloon’ payment to own the car, return it, or trade it in.

• Monthly payments are typically lower, as you’re financing the car’s expected depreciation, not the full amount.

HP (Hire Purchase):

• You pay a deposit, then fixed monthly instalments covering the car’s full value (plus interest).

• Once all payments are made, you own the car outright.

• Payments are higher than PCP, as you’re buying the car in full over the term.

APR (Annual Percentage Rate):

• The total cost of borrowing, including fees and interest, shown as a yearly rate.

Balloon Payment:

• The lump sum required at the end of a PCP deal to own the car.

Mileage Limits:

• PCP typically includes annual mileage limits. Exceeding these may incur extra charges.

Comparing Your Options: PCP or HP?

Personal Contract Purchase (PCP):

• Suits those who want lower monthly payments and flexibility at contract end.

• Ideal if you like changing cars every few years or may not want to own the car.

• At contract end, you can return the car (no further commitments), pay the balloon payment to own it, or use any positive equity as a deposit on your next car.

Hire Purchase (HP):

• For buyers who want to own the car outright at the end.

• Payments are higher than PCP but there’s no large final payment.

• No mileage restrictions, so ideal for high-mileage drivers.

• Once the last payment is made, the car is yours with no further obligations.

Cost, Impact, and Risks

• Monthly Cost: PCP usually offers lower monthly payments, but you don’t own the car unless you pay the balloon payment at the end.

• Total Amount Payable: HP typically costs more per month but could be cheaper overall if you intend to own the car and keep it long-term, as there is no large final payment.

• Equity: With PCP, the car’s value at the end may be less than the balloon payment, especially if you exceed mileage or the car’s condition is poor.

• Risks: With both, failing to keep up with payments can result in the car being repossessed, as the car is security for the loan.

Eligibility, Requirements, and Conditions

Both PCP and HP require:

• A deposit (usually 10% of the car’s price or more)

• Proof of income and identity

• Good to fair credit rating for the most competitive rates

• Age 18 or older, UK resident

For PCP:

• You must adhere to mileage and condition requirements or face additional charges.

• Early termination may involve extra fees.

For HP:

• No mileage restrictions, but you do not own the car until the last payment is made.

How It Works: Step-by-Step

1. Choose your car and finance option

2. Agree deposit and contract length

3. Complete credit and affordability checks

4. Sign the agreement

5. Make monthly payments as agreed

6. For PCP: Decide at term end (return, keep, or trade in)

7. For HP: Make final payment to own the car

8. Receive car ownership documentation

Pros and Cons: What to Consider

PCP Pros:

• Lower monthly payments

• Flexible end-of-contract options

• Access to new cars more often

PCP Cons:

• Mileage and condition restrictions

• Large balloon payment to own

• You never own the car unless you pay extra

HP Pros:

• Straightforward path to ownership

• No mileage limits

• No large final payment

HP Cons:

• Higher monthly payments

• Less flexibility if you want to change cars mid-term

Before You Decide: Things to Watch Out For

• Mileage and Condition: Underestimating your mileage on PCP can be costly. Check the excess mileage rate before signing.

• Depreciation: The car may be worth less than expected at contract end, affecting your options.

• Early Settlement: Both agreements can be expensive to exit early—check terms for early repayment or termination.

• Interest Rates: Compare APRs carefully. A lower monthly payment doesn’t always mean a better deal in the long run.

• Optional Extras: Consider if you need GAP insurance, servicing, or protection products—these can add to costs.

Other Options to Consider

• Personal Loans: Borrow the full car price, buy the car outright, then repay the loan. No mileage or condition limits, but you need good credit.

• Leasing (PCH): You never own the car, but monthly payments are often competitive with PCP. Good for those who want a new car every few years.

• 0% Finance Deals: Some manufacturers offer interest-free credit, but terms and eligibility can be strict.

Frequently Asked Questions

Q: Can I settle my PCP or HP agreement early? A: Yes, but there may be early settlement fees. The lender can provide a settlement figure on request.

Q: What happens if I exceed my mileage on PCP? A: You’ll pay an excess mileage charge for every mile over the agreed limit, so estimate your usage realistically.

Q: Who owns the car during the agreement? A: The finance company owns the car until you’ve made all payments. For PCP, ownership only transfers if you pay the balloon payment.

Q: Is a deposit always required? A: Most agreements require a deposit, but some promotions may offer zero-deposit deals.

Q: What credit score do I need? A: Better rates are available to those with good credit, but options exist for most profiles. Your eligibility may affect interest rates.

Q: What if I can’t afford payments? A: Contact your lender immediately. Repossession is possible if payments are missed, but lenders may help with restructuring.

Next Steps

Take time to assess how long you intend to keep your car, your expected mileage, and your monthly budget. Compare PCP and HP deals from reputable brokers and lenders, and read all terms carefully. If in doubt, seek independent advice or use comparison tools to gauge the best option for your needs.

Disclaimer

This article is for information only and does not constitute financial advice. Finance products are subject to status and terms. Always read agreements carefully and consult a qualified adviser if unsure.