PCP vs HP: Which Is Best For You?

Car finance is a really common way of paying for a new car.
When you buy a car on finance, you’re basically borrowing money from a finance lender and paying back your debt (often with interest) in monthly instalments until your contract finishes and you’ve paid everything back. There are a couple of different finance agreements, with the most common being Personal Contract Purchase (PCP) and Hire Purchase (HP). Knowing which you’ve signed up to will help you budget effectively each month, and give you an idea of what could happen at the end of the contract. With HP, for example, you’ll own the car outright. With PCP, though, you’ll have a couple of options – and if you want to own the car outright you’ll need to have saved up for a final balloon payment. In this article, we’ll talk you through the key differences between PCP and HP, their pros and cons, and help you decide which is best for you.

Hire Purchase (HP) is a way of paying for a car in instalments while you use it.
You’ll pay a deposit and agree to a set monthly repayment and interest rate. If you choose a HP contract, the total amount you borrow will be divided into equal monthly payments. HP contracts tend to last three or four years, so you’d make 36 to 48 payments towards the total cost of your car. At the end of the contract, you’ll have paid off the amount you borrowed in full and own the car.

How much will I pay?

The amount you pay each month depends on the size of the deposit and the length of your contract, plus any interest charged and purchase or contract fees. Larger deposits and longer contracts tend to result in lower monthly payments, but you’ll pay more interest over time, so could end up paying more for the car in the end. Remember that missing payments can affect your credit score and may result in vehicle repossession.

How much interest am I charged?

The amount of interest charged is usually presented as the annual percentage rate (APR). Sometimes finance lenders or dealers run a deal in which you pay 0% APR for part or all of the contract – this will be at the discretion of the lender, and may depend on your credit rating among other factors. Always check the small print before you sign.

Hire Purchase example

Let’s say you sign for a car worth £20,000, and pay a £4,000 deposit. It’s a four-year HP contract with a 5% APR, so your monthly payments would be approximately £368.

Personal Contract Purchase (PCP) is similar to Hire Purchase in that you borrow money and pay back in monthly instalments.
As with HP, you pay a deposit at the start and make monthly payments after. Unlike HP, however, you don’t pay off the full value of the car in equal instalments. Instead, you pay off the amount the finance lender predicts the car will lose in value (depreciate) over the length of the contract, minus your deposit. This is called the minimum guaranteed future value (MGFV).

How does MGFV work?

So say you get a car worth £30,000 and it’s projected that in three years, the car will be worth £22,000. You’ll pay back the £8,000 difference over your three-year contract, in 36 instalments. The MGFV will vary between cars, trim levels and engine sizes. You’ll pay monthly for the duration of your contract, usually for 24 to 48 months. The MGFV can also be affected by the length of your contract and the car’s mileage at the end of the contract. The higher the mileage, and the older the car, the less valuable it will be at the end of the contract and so the more you’ll have to pay each month.

What is a balloon payment?

As you’re only paying off the MGFV, a large percentage of your debt is left to the end of the loan. It usually means you pay smaller amounts each month compared to HP. But you’ll have to pay off the remaining amount in a ‘balloon payment’ before you own the car. The balloon payment is a lump sum due at the end of the PCP contract, calculated based on the car’s projected depreciation. Before you make this payment, the car belongs the lender – so you’ll have to sign a contract with an agreed annual mileage and keep the vehicle in good condition. If you cannot afford the balloon payment, you can return the car or refinance the remaining amount.

What are my options at the end of a PCP contract?

With PCP, you can: • Make the balloon payment and finish buying the car • Return the car to the lender and walk away, provided it is in suitable condition and you haven’t exceeded your mileage • Start another PCP agreement for a different car. If you’ve kept the mileage low and the car in great condition, it might be worth more than the predicted MGFV. You could then use the difference between your final payment and its true market value as a deposit on another PCP contract car.

PCP example

As above, say you get a car worth £30,000 and pay a £5,000 deposit. It’s a three-year PCP contract, and it’s projected that in three years, the car will be worth £22,000. You’ll pay back the £8,000 difference over your three-year contract, in 36 instalments. That comes to £220 per month. But you’ll also have to save for a final balloon payment of £15,000 to pay off the car if you want to keep it at the end. In a PCP agreement, the initial deposit and the final balloon payment play significant roles in determining your monthly payments and the total cost of the car. Make sure to budget for the balloon payment if you intend to keep the car.

Both HP and PCP contracts usually require a deposit upfront towards the cost of the car. This is deducted from your overall repayment.
You may also have to pay contract and arrangement fees, early repayment charges, and other costs. For instance, some contracts include a setup fee of £200 or an early termination fee if you repay the loan ahead of schedule. Always request a full breakdown of fees before signing any agreement and budget for any additional costs.

Here, we’ll listen the key differences between PCP and HP. As you read, think about which would best suit you.
Let's compare the key areas in these two finance agreements: • Overall cost of the contract • Mileage allowance • Car maintenance • Owning the car

Hire Purchase repayments can be high compared to PCP, but they’re fixed for the length of the contract. So, provided you keep up to date, you know how much you’re paying every month.
You’ll normally pay around 10% of the car’s value for a deposit, and an interest rate of between 4% and 8%. PCP contracts are built around the minimum guaranteed future value (MGFV) of a car. This is how much the car is projected to be worth at the end of the contract and can vary. Monthly PCP payments tend to be lower than HP, but you’ll have to budget for the final balloon payment if you want to keep the car. Both PCP and HP deals charge interest. The interest rate you pay will depend on a number of factors, including the car you’re paying for, the length of your contract and your credit rating. Sometimes, 0% interest deals are available but you normally have to pay a higher deposit to secure them.

Hire Purchase contracts don’t tend to include mileage limits, as you’re buying the car in instalments.
Under a PCP contract, you’re technically borrowing the car from the finance lender until you pay the balloon payment and buy it off them. As such, the lender will agree a mileage allowance with you – this is a set number of mile you can do a month, or over the span of the contract. The more mileage you do, the less the car will be worth at the end of the contract, so lower mileage contracts tends to be cheaper. Just note that if you exceed your mileage allowance, you’ll have to pay an excess mileage fee which can prove quite expensive. As always, explore your options before you commit.

Hire Purchase contracts don’t tend to include fines for wear and tear. As with mileage allowance, you’re buying the car in instalments so the car will belong to you at the end. If it’s in a bad state, that’s your problem.
And just like with mileage in a PCP deal, as you’re borrowing the car from the finance provider, so they’ll insist you take good care of their property. The minimum guaranteed future value (MGFV) is partly based on your returning it with a full manufacturer service history, so proper maintenance and servicing is essential. Some contracts specify you can only get your car serviced by their dealer service network, so check the fine print and ask the provider if this is the case. If you return the car at the end of your PCP contract, you may have to pay to cover any damages that aren’t classed as fair wear and tear.

Under a Hire Purchase agreement, you’re paying off the car in instalments and will own it at the end of the contract. Each payment increases your equity in the car, leading to full ownership at the end.
Under a PCP agreement, you can choose to buy the car with a final balloon payment, return it, or trade it in against another car. PCP builds less equity since a significant portion of the car's value is deferred to the balloon payment. If you want to buy the car, Hire Purchase agreements can work out cheaper overall - but this depends on the cost of the car, the interest rates you’ll pay and other factors.

There’s something to be said for both.
Consider your driving habits: if you drive long distances, HP might be better as there are no mileage limits. If you prefer newer cars every few years, PCP offers flexibility. Take your time and explore your options. Many retailers often offer both types of agreements themselves, while smaller dealers may work with third-party finance companies. Independent brokers can also be helpful for finding quotes. Interest rates can vary depending on your credit score and the lender's terms, so always compare rates before deciding. Comparing offers from different companies can help you find the right one for you. Tools like finance calculators can also help you work out potential costs. You can learn more about both Hire Purchase and Personal Contract Purchase contracts on Autotrader, and compare finance deals with us too.

Sometimes finance providers or dealers run a deal in which you pay 0% APR for part or all of the contract – this will be at the discretion of the lender, and will depend on your credit rating among other factors. Always check the small print before you sign.
While it’s an appealing option, you should work out whether 0% actually works for you. It can involved larger deposits upfront and higher monthly repayments to pay the car off more quickly– learn about 0% finance here.

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