HP vs PCP Car Finance: What’s the Difference?

Cutting through the jargon - your clear path to the right deal

Choosing between Hire Purchase (HP) and Personal Contract Purchase (PCP) is about more than chasing the lowest monthly figure. It is about control - of costs, ownership, and how you use your car. In the UK, over eight in ten new cars are financed, and most buyers weigh these two routes. This guide explains the real differences so you can pick a plan that suits your budget and lifestyle.

PCP usually offers lower monthly payments because you only cover the car’s depreciation during the term. A large final amount - the Guaranteed Minimum Future Value (GMFV) - sits at the end. On a £30,000 car with a £10,000 deposit over 36 months, PCP might be around £555.55 per month. That can be easier on cash flow, especially if you like driving newer models more often. At the end, you choose to pay the balloon to own, hand the car back if it meets mileage and condition rules, or use any equity towards your next car.

HP takes a straighter road. Your monthly payments cover the full cost of the car plus interest over the agreed term. There is no balloon to consider and you will own the vehicle at the end, often after a small option-to-purchase fee. Payments will be higher than PCP for the same car - for the above example, roughly £833.33 per month - but there are no mileage limits and no return-condition rules. If long-term ownership matters to you, HP brings certainty.

Interest rates vary by credit profile, vehicle, and term length. Because PCP leaves a sizeable balance outstanding until the end, it can cost more in total interest even if the monthly payments are lower. Both agreements are credit products regulated in the UK. During the term, the finance company owns the vehicle, so missed payments can lead to repossession. That is why affordability, honest mileage estimates, and choosing a reputable broker and lender matter.

The right choice depends on how long you keep cars, how many miles you drive, and how you prefer to manage cash flow.

Is this guide for you?

If you live in the UK and are weighing up a new or used car with finance, this is written for you. It is especially useful if you want a level-headed explanation that focuses on real costs and practical trade-offs instead of marketing soundbites. High-mileage drivers will see why HP often fits better. Drivers who like upgrading every 2 to 4 years will understand the flexibility that PCP can unlock. If you are unsure how deposits, APR, mileage limits, and balloon payments work in practice, we will make it straightforward.

Kandoo is a UK-based retail finance broker that helps you compare options from reputable lenders. We aim to make the process transparent so you can make a confident choice that suits your budget.

Your financing routes at a glance

1. PCP - lower monthly payments, optional balloon at the end, mileage limits apply.

2. HP - higher monthly payments, own the car at term end, no mileage limits.

3. Pay cash - no interest or contracts, but ties up savings.

4. Personal loan - fixed repayments, own the car from day one, rates vary.

The numbers that matter most

Who can qualify and what lenders look for

Lenders will assess credit history, income stability, existing commitments, and the vehicle you are financing. A deposit is often helpful, typically from £1,000 to £10,000 depending on the car price and your budget. PCP and HP both require affordability checks. If your credit is stronger, you will generally access lower APRs. If it is thinner or challenged, you may still be approved, but at a higher rate and possibly with a larger deposit.

PCP agreements include an agreed annual mileage - commonly 8,000 to 10,000 miles - which feeds into the GMFV. Underestimating mileage risks excess charges of around 10p to 20p per mile and can reduce your end-of-term flexibility. HP does not have a mileage allowance, which is why it often suits longer commutes and frequent motorway driving. Both products are regulated in the UK, with lender ownership during the term. Missed payments can lead to repossession, so build a realistic budget and consider income shocks before you commit. Kandoo can help you compare lender criteria and find a tailored fit.

How to move forward confidently

1. Work out your realistic monthly budget and deposit.

2. Estimate annual mileage and ownership horizon.

3. Get personalised quotes for PCP and HP.

4. Compare total cost, not just monthly payments.

5. Read key terms - mileage, fees, and GMFV.

6. Choose the product that fits how you use cars.

7. Complete checks and sign with a trusted broker.

Quick pros, cons, and trade-offs

Lower monthly payments are not the same as lower total cost.

What to check before signing

Before you commit, stress-test your budget. Could you afford payments if your costs rose or income dipped for a few months? With PCP, be honest about mileage and how carefully you keep the car. Exceeding limits or returning a poorly kept vehicle invites charges that can wipe out any perceived saving. With HP, weigh the higher monthly payments against the peace of mind of eventual ownership. In both cases, check fees, early settlement terms, and how your deposit changes the total amount payable. Use personalised APRs, not headline examples, and verify that the broker and lender are reputable and UK regulated. A few careful checks now will save you hassle later.

Alternatives to consider

1. Bank or credit union personal loan - own from day one, fixed terms.

2. Leasing/contract hire - low monthly payments, no ownership route.

3. Buying nearly new or used - lower price trims finance and insurance.

4. Delaying purchase to save more deposit - reduces borrowing and interest.

5. Salary sacrifice for EVs - potential tax advantages if available via employer.

Frequently asked questions

Q: Why are PCP monthly payments usually lower than HP? A: With PCP you pay mainly for depreciation during the term, leaving a balloon (GMFV) to the end. HP repays the full price, so monthly payments are higher.

Q: Will I own the car at the end? A: HP - yes, after your final payment, often plus a small fee. PCP - only if you pay the GMFV. Otherwise, you can return the car or trade in.

Q: Do PCP agreements have mileage limits? A: Yes. You agree a mileage allowance upfront. Exceeding it usually triggers charges per mile and can affect your end-of-term options. HP has no mileage limits.

Q: Which costs more overall - HP or PCP? A: It depends on the APR, term, and deposit. PCP can cost more overall because the balance reduces slower, even though monthly payments are lower. Compare total amounts payable.

Q: What happens if I miss payments? A: With both PCP and HP, the finance company owns the car during the term. Missed payments can lead to late fees, damaged credit, and potential repossession.

Q: Can I settle early? A: Usually yes. Ask for an early settlement figure. There may be interest rebates plus potential fees. Check terms before you sign.

Q: Is a deposit required? A: Not always, but a deposit often lowers monthly payments and the total amount payable. Many UK deals use around 10 percent as a starting point.

How Kandoo can help

Kandoo is a UK-based retail finance broker. We connect you with a panel of trusted UK lenders so you can compare HP and PCP side by side, using real rates and terms. We help you understand monthly payments, total costs, and suitability based on your mileage and ownership goals, then support you through a quick, secure application.

Important information

This article is for general guidance only and does not constitute financial advice. Finance is subject to status, affordability, and lender criteria. Terms may vary by lender and product. Always read your agreement carefully and consider independent advice if unsure.