PCP vs HP: Which Car Finance Option Is Right for You?

The essentials in plain English

Personal Contract Purchase and Hire Purchase are the two pillars of UK car finance. On the surface they look similar: fixed monthly payments, a deposit, and interest. Under the bonnet they behave quite differently. PCP typically finances the car’s depreciation with a balloon to settle at the end, so monthly payments are usually 30 to 40 percent lower than HP for the same car and term. For example, on a £20,000 car with a 10 percent deposit over three years, PCP might sit around £250 per month with a £7,000 optional final payment. HP on the same car could be closer to £350 per month, but you will own the vehicle outright at the end after a small option to purchase fee.

This split matters because affordability is not only about the sticker price. It is about monthly cash flow, how far you drive, and whether you value flexibility or ownership. PCP suits those who like changing cars every two to four years, prefer lower payments, and want the option to return the car at the guaranteed minimum future value. HP is straightforward ownership shared across the term with no mileage caps or end-of-contract inspections.

It is also vital to factor in APR. Dealers often promote compelling PCP rates, but interest still applies to the amount financed, including the deferred balloon. HP may come with a different APR structure and can be more transparent on total cost over the full term. With both, missed payments risk repossession, and your credit profile will shape eligibility and pricing.

Understanding APR is not just about percentages - it is knowing what you will pay in pounds and pence over time.

If you plan to keep the car long term, HP often delivers clarity and can work out cheaper overall. If you prefer frequent upgrades and value predictable, lower monthlies, PCP offers the flexibility to switch without the hassle of selling.

Who should consider which route?

If you rack up motorway miles, want zero worries about condition charges, and plan to keep your car beyond the finance term, HP is typically a better fit. You pay down the full price and become the legal owner once the final instalment and the small option to purchase fee are cleared. Budgeting is simple and you are free from mileage limits.

If you like a new car every few years, benefit from manufacturer incentives, and want lower monthly outgoings, PCP aligns neatly. At the end you can hand the car back, part exchange it for another, or pay the balloon to keep it. Just be mindful of annual mileage caps and the need to return the vehicle in fair condition to avoid fees.

Your choices at a glance

1. PCP - lower monthly payments, optional final balloon, return or keep.

2. HP - higher monthly payments, no balloon, you own the car at term end.

3. Personal loan - own from day one, flexible usage, rates vary by credit.

4. Cash purchase - no interest, strongest negotiating position, ties up savings.

Cost, impact and risk comparison

Short examples:

• £20,000 car, 10% deposit, 36 months: PCP ~£250 per month with ~£7,000 balloon. HP ~£350 per month, then ownership.

• £40,000 car, £10,000 deposit: monthly reduction is more pronounced on HP than PCP because HP finances the full balance.

Can you qualify?

Both PCP and HP are regulated credit agreements in the UK and require affordability and credit checks. Lenders assess your credit history, income stability, existing commitments, and the vehicle’s age and mileage. Expect to provide proof of identity, address, and income. A deposit is common, often around 10 percent, though some deals allow higher or zero deposits depending on profile and vehicle. If your credit score is stronger, you are more likely to see sharper APRs and a wider choice of terms from 24 to 48 months for HP and typically 24 to 48 months for PCP. Newer cars often attract the keenest PCP campaigns, while used cars are frequently funded via HP.

PCP agreements set an annual mileage allowance and require the car to be returned in good condition if you hand it back. Exceeding the mileage limit will attract per-mile charges and any damage beyond fair wear may incur fees. HP has none of these constraints. With either product, missed payments can lead to the car being repossessed and may affect your credit file. As a UK-based broker, Kandoo can help you compare offers quickly across multiple lenders, matching your circumstances to the structure that best fits your budget and driving habits.

From application to keys - the simple path

1. Check your budget using a UK car finance calculator.

2. Decide on mileage needs and ownership preference.

3. Compare PCP vs HP quotes across several lenders.

4. Choose term, deposit, and realistic annual mileage.

5. Complete a soft search eligibility check where available.

6. Submit documents for full credit assessment and approval.

7. Review agreement, fees and APR carefully before signing.

8. Drive away, then manage payments on time every month.

Advantages and trade-offs

Read this before you commit

Think practically about how you drive. If you commute long distances or your mileage varies year to year, PCP caps could introduce unexpected costs. Set a realistic allowance, not the lowest number that looks good on paper. Next, look beyond the monthly figure. Compare the total payable including any balloon, fees, and optional maintenance packages. Promotional APRs on PCP can be attractive, but interest still accrues on the financed amount and the balloon if you refinance it.

Consider the exit routes. With HP you will own the car outright at the end, which can be valuable if you plan to keep it for years or hand it down. With PCP, decide early whether you are likely to pay the balloon, part exchange, or simply return the vehicle. Finally, check early settlement terms and potential negative equity if you change plans mid-term.

Alternatives worth a look

1. Personal loan - own the car from day one, shop widely for APRs.

2. Credit union finance - competitive rates and supportive underwriting.

3. Leasing (PCH) - fixed rentals, no ownership, return at term end.

4. Cash purchase - avoid interest entirely if savings allow.

5. Salary sacrifice EV schemes - tax-efficient access to electric cars.

FAQs to guide your choice

Q: Why are PCP monthly payments usually lower than HP? A: PCP typically funds depreciation with a final balloon, so the amount repaid monthly is smaller. HP spreads the full cost across the term, making payments higher but with ownership at the end.

Q: What happens at the end of a PCP agreement? A: You can return the car within mileage and condition limits, part exchange it for a new deal, or pay the guaranteed final value to keep it. If you exceed limits, charges apply.

Q: Does HP have any mileage restrictions? A: No. HP has no mileage caps or return inspections. You become the owner after the last payment and a small option to purchase fee, typically £100 to £500.

Q: Which is cheaper overall? A: For long-term keepers, HP can work out cheaper because you avoid a balloon and often benefit from straightforward interest on the borrowed sum. PCP may cost more once the final payment and potential fees are considered.

Q: How much deposit do I need? A: Around 10 percent is common for both. Larger deposits reduce HP payments more significantly, as they directly cut the financed balance. The reduction is smaller on PCP because much of the cost is deferred.

Q: What APR should I expect in the UK now? A: Rates vary by credit profile, vehicle and term. Illustratively, many mainstream deals sit in the high single to low double digits. Always compare across lenders before deciding.

How Kandoo helps you decide

Kandoo is a UK-based retail finance broker that compares multiple lenders so you do not have to. We help you weigh PCP against HP with real monthly figures, eligibility guidance, and clear total cost projections. Tell us your budget, mileage and car preferences, and we will surface competitive options and support you through to approval.

Important information

This guide is for UK consumers and general information only. It is not financial advice. Finance is subject to status, affordability and vehicle criteria. Terms, APRs and fees vary by lender. Always read the agreement carefully and consider seeking independent advice if unsure.