PCP vs HP car finance: which is best for you?

Cash may once have been king, but today car finance offers a smarter, more flexible way to drive a new car. Understanding PCP vs HP can help you find the right deal for your budget.

If you’re thinking about financing a car, you might be wondering about the difference between PCP and HP finance.

In simple terms, HP is often better if you want to own the car at the end of the agreement, while PCP can suit drivers who prefer to change cars every few years.

Before taking out any finance agreement, make sure the monthly payments fit your budget, and shop around on platforms like Carwow to make sure you’re getting the best deal. This guide explains the key differences between PCP and HP finance to help you decide which option is right for you.

What is Personal Contract Purchase (PCP)?

PCP finance works by splitting part of the car’s value into a deposit and monthly payments. Rather than paying off the full cost of the car, your payments mainly cover the depreciation expected over the length of the agreement.

At the end of the contract, you’ll usually have three options:

• Trade the car in and use any equity towards a new finance agreement
• Make a final lump sum payment (often called a balloon payment) to own the car outright
• Return the car and walk away

Car manufacturers are keen to lock customers into a cycle of switching out their car for a new one every few years, so often put the best offers and the lowest interest rates on PCP agreements.

Benefits of PCP finance

• Lower monthly payments compared with HP
• Smaller deposit in many cases
• Easy to upgrade to a newer car every few years
• No need to worry about selling the car yourself

Disadvantages of PCP finance

• Mileage limits and damage charges may apply
• A large final payment is needed if you want to keep the car
• PCP is usually only available on newer vehicles

What is Hire Purchase (HP)?

In many ways, HP is the simplest type of car finance. The cost of the car is split into an initial deposit followed by fixed monthly payments, plus interest. Once all payments have been made, you own the car outright and can choose to keep it or sell it.

HP agreements are flexible, with terms typically ranging from 12 to 60 months. Shorter terms usually mean higher monthly payments but less interest overall, while longer terms can reduce monthly costs but increase the total amount you pay.

Benefits of HP finance

• You own the car at the end of the agreement with no large final payment
• No mileage limits or damage charges
• Available on both new and used cars

Disadvantages of HP finance

• Monthly payments are usually higher than PCP
• Less suitable if you like changing cars regularly
• Longer agreements can mean paying more interest overall

What are the differences between PCP and HP?

The biggest difference between PCP and HP finance comes at the end of the agreement.

With HP finance, you’ll own the car outright once all payments have been made, as you’ll have paid off the vehicle’s full value. This means there are no mileage limits or charges for wear and tear. However, if you want to change cars, you’ll need to sell the vehicle yourself or trade it in at a dealership.

PCP finance works differently because your monthly payments only cover part of the car’s value over the agreement term. If you want to keep the car at the end of the deal, you’ll need to make a final lump sum payment, often called a balloon payment.

Criteria	PCP	HP
Deposit required?	Yes	Yes
Fixed monthly payments?	Yes	Yes
Interest charged?	Yes	Yes
Credit check required?	Yes	Yes
Car could be repossessed if payments are missed?	Yes	Yes
Own the car from the start?	No	No
Option to return the car at the end?	Yes	No
Own the car at the end of the agreement?	Optional	Yes
Mileage limits?	Yes	No
Charges for damage?	Possible	No
Potential to build equity?	Yes	Yes

The balloon payment is based on the car’s Guaranteed Minimum Future Value (GMFV) – the estimated value of the vehicle at the end of the agreement. This is agreed before the contract begins.

Your expected annual mileage helps determine the GMFV, which is why PCP agreements include mileage limits. If you exceed the agreed mileage or return the car with damage beyond fair wear and tear, additional charges may apply.

How much does a car cost on HP vs PCP?

Let’s compare HP and PCP using the same £40,000 car, with the assumptions that:

• £10,000 deposit
• Three-year (36 month) term
• 0% interest (for simplicity)
• PCP GMFV (final value) = £10,000

Hire Purchase (HP)

You finance the full remaining balance:

• £40,000 − £10,000 = £30,000
• £30,000 ÷ 36 months = £833.33/month

At the end of the agreement, you own the car outright.

Personal Contract Purchase (PCP)

You only finance the depreciation:

• £30,000 − £10,000 GMFV = £20,000
• £20,000 ÷ 36 months = £555.56/month

At the end, you can:

• Pay £10,000 to own the car
• Return it
• Or part-exchange it

PCP vs HP: what’s better?

PCP and HP are two ways to finance a car, but which one is better depends on whether you want lower monthly payments or full ownership.

When would I choose a HP deal?

A HP agreement may be better if:

• You plan to keep the car long-term and want to own it at the end
• You want guaranteed ownership without a final balloon payment, unlike PCP where the car only becomes yours if you choose to pay it
• You prefer not to worry about mileage limits or potential charges for wear and tear when returning a PCP car

When would I choose a PCP deal?

PCP finance may be better suited to you if:

• You like changing your car every few years and upgrading to newer models
• You want lower monthly payments, often with a smaller deposit compared to HP
• You’re concerned about depreciation and prefer to avoid owning a car long-term

PCP vs HP FAQs

Where can I get HP or PCP finance?

Main dealers usually offer both PCP and HP finance options, while smaller dealers may also provide them through third-party finance companies. Independent brokers can also help you find deals. PCP is generally more widely available due to its popularity.

Do I own my car on HP or PCP?

With both HP and PCP, the finance company owns the car during the agreement. You are, however, the vehicle’s registered keeper, and the V5C document will be in your name.

With HP, you own the car outright once the final payment is made. Meanwhile, with PCP, you only own the car if you choose to pay the final GMFV (balloon payment).

When can I change my car on HP or PCP?

In most cases, you change your car at the end of the agreement.

With HP, you’ll need to sell or part-exchange the car if you want funds for your next vehicle, as you own it outright.

With PCP, you can simply return the car or part-exchange it for a new deal.

Can I end my car finance early?

Yes, but you typically need to have repaid at least 50% of the total finance agreement (including interest and fees) under both HP and PCP agreements.

Early termination is possible, but it’s often not the most cost-effective option unless necessary.

Is car financing better than leasing?

Leasing (also known as Personal Contract Hire or PCH) is essentially a long-term rental agreement where you never own the car.

How do I get the best finance deal?

0% APR PCP deals are often the most attractive option, but they may require a strong credit score, a larger deposit, and are usually limited to specific models.

What other car finance options are available?

Alongside PCP, HP, and leasing (PCH), you could use a personal loan from a bank to buy a car outright.

Some people also use credit cards with 0% balance transfer offers, but this requires careful management of limits, transfer fees, and expiry dates on promotional rates.

Car change? Carwow!

Looking for a new set of wheels? With Carwow you can sell your car quickly and for a fair price – as well as find great offers on your next one. Whether you’re looking to buy a car brand new, are after something used or you want to explore car leasing options, Carwow is your one stop shop for new car deals.

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