PCP vs HP finance: which is best for you?

If you’re looking to finance a car, you may be wondering what differences there are between PCP and HP deals; we can help

The two most common types of car finance are Hire Purchase (HP) and Personal Contract Purchase (PCP). To put it simply, HP could be the better option if you plan to own your new car at the end of the agreement; whereas PCP may be more suitable if you like to change it every few years.

As with any loan, it’s important to make sure you can afford to keep up the monthly payments before you enter into the agreement. Paying in cash is always an option and one that may be better suited to your situation.

What is Personal Contract Purchase (PCP)?

PCP splits a percentage of the vehicle’s value into a deposit amount and a series of monthly payments. When the contract ends you’ll typically have three options, the most popular of which is to trade the car in for a new one paid for using a new finance agreement. The monthly payments and deposit don’t actually pay off the car, but instead the depreciation it is predicted to experience over the length of the contract.

You can also pay a lump sum, often known as a balloon payment if you’d prefer to own your current car outright. If you’re not bothered about keeping the car or jumping straight into a new one, you can choose give the car back and walk away at the end of your finance term.

Benefits to PCP finance:

• Not having to worry about covering the cost of depreciation – you don’t have to sell the car when your agreement ends.
• Typically, a smaller deposit and lower monthly payments than HP because some of the car’s value is deferred into the final payment.
• Being able to trade the car in regularly for the latest model.

Disadvantages to PCP finance:

• There are often more terms and conditions to consider, such as the agreed mileage limit and charges for damaging the car.
• You’ll have to make a large final payment if you decide you want to keep your car at the end of your finance term.
• PCP deals are normally only available on newer cars.

Take a look at our Personal Contract Purchase finance guide to find out more

What is Hire Purchase (HP)?

In some ways, HP is the simplest form of car financing. The cost of your new car is broken down into an initial deposit and a series of monthly payments, plus interest. At the end of the agreement, you own the car so you can decide to keep it or sell it on.

A Hire Purchase agreement can be taken out over a time period that suits you. You can go from as little as 12 months if you want to pay more per month but pay it off quickly, or up to 60 months. Just be aware that the longer the term, the more interest you’ll typically pay.

Benefits to HP finance:

• You own the car at the end of the agreement without having to pay a large final fee, meaning you’re free to keep it or sell it on.
• There are no mileage limits or charges for damaging the car.
• It’s available on both new and used cars.

Disadvantages to HP finance:

• The initial deposit and monthly payments are likely to be higher than a comparable PCP deal.
• May not be ideal if you want to change your car after a few years.
• The interest you pay may be higher because the payments are spread out over a longer period of time.

Check out our Hire Purchase finance guide for more information

What are the differences between PCP and HP?

The main difference between PCP and HP comes at the end of your agreement. At the end of a HP deal, you are the legal owner of the car because you will have paid off its the full value.

This means there is no limit on the mileage you can cover, or any fees if you damage the car. It does mean however that if you want a new car, you’ll have to either sell your existing model yourself or trade it in at a dealership.

PCP finance is slightly different, as you only pay off a portion of the vehicle’s value over the whole finance term. If you wish to own it at the end, there is a final lump sum to pay which is commonly known as a balloon payment.

The balloon payment is based on what dealers call the ‘guaranteed minimum future value’ (GMFV). This is determined before you sign the contract and represents the amount the dealer expects the vehicle to be worth when your agreement ends.

The car’s mileage will have an impact on the GMFV, so you’ll be asked how many miles a year you plan on covering, with a charge if you go over this amount. There will also be a fee to pay if you return the car with any damage.

How much does a car cost on HP vs PCP?

Let’s say the same £40,000 car is available via HP and PCP finance. For the sake of argument and simple calculations, we’ll also assume you’ve managed to find a 0% interest deal (possible with a PCP deal, not so with HP).

You put down a £10,000 deposit, and when the deal ends after three years the optional GMFV payment the PCP deal brings is £10,000.

That leaves you having to pay off £30,000 with the HP deal, but only £20,000 with the PCP. This leaves you paying £555.55 a month with the PCP, or £833.33 with the HP – although at the end of the HP deal you will own the car, whereas at the end of the PCP you will not – unless you pay the GMFV.

When would I choose a HP deal?

There are a few scenarios where a Hire Purchase agreement may be better for you, such as:

• If you like to hold onto your cars for a long time, therefore want to keep it at the end of the agreement.
• If you want to own the car – with PCP it always remains the property of the finance company unless you choose to pay the final balloon payment at the end of your agreement.
• If you don’t want to have to stick to a mileage limit or worry about being billed for damage when you return the car.

When would I choose a PCP deal?

PCP finance may be better suited to you if:

• You like to trade your car in for the latest model every few years.
• You’d like to have a (typically) smaller deposit and lower monthly payments.
• If you’re concerned about a car’s depreciation.

How to compare PCP and HP finance deals

One of the most common ways of financing is to sort it directly with the dealer you’re buying your car from. If they’re advertising a cash price, you can ask them about their financing options if that’s your preferred method of payment.

There are numerous third-party companies offering PCP and HP deals, and you may be able to get a better deal than the dealer is offering you. If you choose to accept a deal from a different company, they will pay the dealer for the car and you will repay the company you’ve borrowed from — more formally referred to as a lender.

You can compare offers on finance through carwow by configuring your ideal car and dealers will come back to you with their best offers. Alternatively, use our handy PCP calculator to find out how much your next car could cost.

PCP Vs HP FAQs

Is HP or PCP better?

These two financial products perform different functions, though given PCP deals are significantly more popular than HP deals, it’s clear which the market prefers.

Where can I get HP or PCP finance?

Main dealers should be able to offer you both PCP and HP deals, while smaller dealers may also be able to provide both by using a third-party finance company. Independent brokers may also be able to help. Given the popularity of PCP deals, you may find these easier to come by.

Do I own my car on HP or PCP?

The finance company owns the car for the duration of the contract with both HP and PCP deals. With HP deals you will own the car outright at the end, while with PCP deals you will not – unless you pay off the GMFV balloon.

When can I change my car on HP or PCP?

Generally speaking, at the end of the deal – though with HP you will own the car outright at the end of the deal, so you will need to sell it if you need the money to fund another car.

Can I end my car finance early?

You need to have paid off 50% or more of the loan agreement (including interest and fees) in order to leave a PCP or HP deal early, but with contracts designed to be seen through to the end, it is often financially advantageous not to do this unless you really have to.

Is car financing better than leasing?

Leasing (also known as personal contract hire, or PCH) is a type of car finance, and essentially amounts to a long-term rental agreement.

How do I get the best finance deal?

The best thing to do is to hunt out 0% interest offers on PCP deals. These may require a strong credit record and a chunky deposit, and they may also be prescriptive about which specific model of car you can get, but if you can make these arrangements work, 0% interest deals essentially amount to free loans.

What other car finance options are available?

Aside from PCH, PCP and HP, you could investigate using a personal loan from a bank to finance a car. If you have a high enough credit limit on your credit card or are looking at a more affordable car, this, you could buy using this method, then taking advantage of 0% balance transfers offered to new customers by some credit-card companies – though you would likely need to take out several new credit cards as 0% APR balance transfers often have limits on the amount being transferred. You’ll also have to take transfer fees into account, and be aware 0% interest offers usually expire after a certain period of time.