PCP vs HP car finance: what's the difference and which is better?

When you're choosing between a PCP or HP car finance, the decision often depends on whether you prefer lower monthly payments or long-term ownership.

PCP finance (Personal Contract Purchase) gives you flexibility and lower monthly payments, while HP car finance (Hire Purchase) prioritises ownership at the end of your car finance agreement.

Our guide will help you understand the key difference between PCP and HP to finance a new or used car in the UK. We'll break down the costs, ownership, and how it works to help you decide what’s right for you.

Watch our quick video on PCP vs HP finance explained below.

For a PCP vs HP comparison based on your circumstances, try using our car finance calculator to give you figures to compare.

Key takeaways

• PCP finance typically offers lower monthly payments than HP car finance, along with the flexibility to return, swap, or buy via a balloon payment.
• HP finance has higher monthly payments but ends with ownership and no mileage or condition charges.
• Choose PCP car finance if you plan to change cars frequently; choose HP finance if you want to keep the car long term and prioritise ownership.
• Over the full term, Hire Purchase often costs less overall, while Personal Contract Purchase can be better for cash flow.

Here's a quick summary of the pros and cons.

What is a Personal Contract Purchase (PCP) agreement?

Personal Contract Purchase, or PCP for short, is a popular way of spreading the cost of buying a car over a set period, typically between two and four years.

You’ll typically pay:

• An initial deposit (some lenders may offer zero deposit car finance)
• Fixed monthly payments for the agreed term

At the end of the agreement, you have three clear options:

• Buy the car by paying a final lump sum (the balloon payment)
• Hand the car back and walk away
• Use any positive equity as a deposit on a new finance deal

The final lump sum is known as the Guaranteed Minimum Future Value (GMFV). It’s the amount the lender estimates the car will be worth at the end of the agreement.

PCP agreements include an annual mileage limit, usually between 6,000 and 15,000 miles. If you exceed it, you’ll pay an excess mileage charge, typically 5–15p per mile. You’re also expected to return the car in fair condition. Damage beyond normal wear and tear can result in additional charges when the car is returned.

PCP finance costs and interest

With PCP, you pay interest on the entire amount financed, including the balloon payment. That means you’re paying interest on money you may never actually borrow if you return the car.

Your APR depends on:

• The lender
• Your credit score
• Market conditions

There may also be:

• Setup fees
• An option-to-purchase fee
• Early settlement charges

All of this affects the total cost, not just the monthly payment. Depending on the finance agreement, ending a PCP loan early can also be expensive. You’ll usually need to repay the remaining monthly payments plus the balloon payment, which can lead to negative equity if the car’s value has dropped.

What are the advantages of PCP?

PCP finance usually comes with lower monthly payments than HP finance because you’re only financing the car’s depreciation, not its full value. In practice, that could mean payments are 30–40% cheaper for the same car on HP finance.

It also offers flexibility at the end of the agreement. You can hand the car back, use any equity towards a new deal, or pay the balloon payment to keep it. This makes PCP appealing if you like changing cars or don’t want to commit to ownership upfront.

Lower payments also make it easier to access newer or higher‑spec cars, often still under warranty. And because the balloon payment (GFV) is set in advance, PCP offers some protection if the car’s value drops more than expected.

PCP loans are a popular EV car finance option. As Electric Vehicle (EV) technology moves fast, PCP protects you from the risk of your car's value dropping if a much better battery comes out in three years. Just hand the keys back to the lender and upgrade.

What are the disadvantages of PCP?

You don’t automatically own the car. To keep it, you’ll need to pay a balloon payment, which can be a large sum. Many drivers find it hard to plan for and end up returning the car or refinancing the PCP balloon payment.

Extra costs can also catch people out. Going over your mileage limit or returning the car with damage beyond fair wear and tear can lead to unexpected charges.

Although PCP might look cheaper month to month, the total cost can be higher than HP once interest on the balloon payment and fees are included. And while early exit is possible through voluntary termination, most drivers only reach that point late in the agreement, making PCP less flexible if your plans change.

Learn more about car refinance to see if it could help lower your payments.

What is a Hire Purchase (HP) agreement?

Hire Purchase (HP) is one of the simplest ways to finance a car. You split the full cost of the car (plus interest) into equal monthly payments. Once you make the final payment, you own the car outright, and there’s no balloon payment.

You’ll usually:

• Pay an initial deposit (often 10%)
• Make fixed monthly payments for 1–5 years
• Pay a small 'option to purchase' fee at the end to transfer ownership

Unlike PCP, there are no mileage limits, wear-and-tear conditions, or end-of-term decisions. You’re buying the car from the start, and each payment gets you closer to owning it.

What are the advantages of HP finance?

Simple ownership structure

Every monthly payment builds equity. Once the contract ends, the car is yours, and there’s no balloon payment to worry about. That makes HP finance ideal if you want a long-term car without confusing contract terms.

No mileage or condition rules

Drive as much as you like without worrying about extra charges. HP car finance works well for high-mileage drivers or anyone whose usage varies.

Clear budgeting

Fixed payments help with monthly budgeting. There are no hidden fees tied to future car values, and the structure is easy to understand, especially for first-time buyers.

Great for long-term ownership

Many people keep their HP-financed cars for 7 to 10 years. Once the loan is paid, there are no more monthly payments, making it a solid financial choice for reliable cars.

Easier to get for used cars or lower credit

Since the lender owns the car until the loan is repaid, some HP deals are available to buyers with lower credit scores. It’s also more accessible for older or high-mileage cars, which PCP may not cover.

What are the disadvantages of HP?

Higher monthly payments

Because you’re financing the full value of the car, HP payments can be higher than PCP. For example, a £200 per month PCP deal might cost £300 per month on HP. This can limit your car choice or stretch your budget.

Less flexibility

Unlike PCP, you can’t just hand the car back if your needs change. To switch cars mid-term, you’ll need to pay off the remaining finance, which can lead to negative equity, especially early in the agreement.

You take the depreciation hit

Car values often drop 50–60% in the first three years. With HP, that risk is yours. If the car loses more value than expected, you can’t walk away like you could with a PCP.

Early settlement costs vary

Some lenders offer interest rebates if you settle early, but others charge fees. If your situation changes, HP’s higher payments can be harder to keep up with compared to PCP’s lower monthly costs.

Try our early settlement calculator to explore your options.

Deposits and rates can be higher

If your credit history isn’t great, you may be asked for a bigger deposit or offered higher APRs. That’s why it’s important to compare deals and lenders to find one that fits your budget.

PCP vs HP: The key differences

Ownership

With PCP, you don’t own the car unless you choose to pay the final balloon payment. HP guarantees ownership, and the car is yours once you’ve made all the payments.

Monthly payments

PCP payments are typically lower than HP because you're only covering the car’s depreciation. HP payments are higher because you’re financing the full value of the car. But every HP payment builds equity.

Total cost

PCP loans often can look cheaper month-to-month, but can cost more overall once interest and the balloon payment are included. If you plan to keep the car long term, a HP loan usually works out cheaper. If you prefer switching cars every few years, PCP might be worth the added cost.

Usage restrictions

PCP car loans come with mileage limits (usually between 6,000 and 12,000 miles per year) and rules about fair wear and tear. Going over or damaging the car can lead to extra charges. HP has no mileage or condition limits and is useful if your driving habits vary or you cover high mileage.

End of agreement

PCP gives you three choices at the end: return the car, trade it in, or pay the balloon to keep it. This gives flexibility, but can feel like pressure if you haven’t planned ahead. Meanwhile,  HP car finance ends when you own the car after your final payment and a small fee.

Budgeting

PCP requires planning for the balloon payment or refinancing it later. HP needs a bigger monthly budget upfront, but offers peace of mind knowing the car will be yours without a lump sum at the end.

PCP vs HP monthly cost comparison

PCP payments are usually lower because you're only financing the car's depreciation, not its full value. HP payments cover the entire car cost plus interest, which makes them often 30–40% more each month for the same car on PCP finance.

A larger deposit lowers payments on both deals. But with PCP, the saving is smaller because you’re still only financing the depreciation. With HP, a bigger deposit directly reduces the amount borrowed, so monthly savings are more noticeable.

APR and term length also impact the deals differently. PCP often offer lower APRs through manufacturer promotions, but interest is applied to the entire amount, including the balloon payment. HP might have slightly higher APRs, but interest is only charged on what you borrow.

Example:

• £20,000 car over 3 years with 10% deposit
  • PCP car finance: ~£250 per month with £7,000 balloon at the end
  • HP finance: ~£350 per month, no balloon payment

So while PCP saves you £100 per month, you'll need £7,000 at the end if you want to keep the car.

The trade-off:

• PCP finance = lower payments, more flexibility, potentially higher total cost
• HP finance = higher payments, clearer cost, guaranteed ownership

When should you choose a PCP loan over HP?

Go for PCP if you value lower monthly payments and flexibility. It’s ideal for drivers who want newer cars, enjoy regular upgrades, and like having options at the end of their contract.

Choose PCP car finance if:

• You like getting a new car every 2–4 years.
• You want protection against your car’s value dropping unexpectedly.
• You drive a predictable number of miles each year (under 12,000 miles per year).
• You want the lowest possible monthly payment.

To avoid surprise charges:

• Track your mileage carefully
• Stick to fair wear and tear guidelines
• Start saving early for the balloon, or explore refinancing options

PCP might also let you drive a higher-spec car than HP allows within the same monthly budget.

When should you choose an HP loan over PCP?

Choose HP if you want straightforward finance and full ownership without the uncertainty of balloon payments.

Choose HP car finance if:

• You want to own the car outright as quickly as possible.
• You plan to keep the car for 5+ years.
• You are a high-mileage driver
• You don’t want any usage rules or condition charges
• You want the lowest total cost over the long term.
• You want to finance an older or high-mileage used car (PCP often not available)

Just make sure your budget can handle the higher monthly cost. Monthly HP car finance payments are often higher than PCP for the same vehicle.

If flexibility matters, ask about early settlement terms before you sign. Some lenders offer rebates, while others apply fees.

Conclusion

PCP offers lower payments and more flexibility, great for regular upgrades and drivers with predictable mileage. HP offers ownership and cost clarity, perfect for long-term buyers who want a simple deal with no surprises.

Whichever you choose, match the deal to your budget, lifestyle, and car goals. Run the numbers using our car finance calculator and see which option makes the most sense for you.

Learn more about Carmoola car finance.

Disclaimer: This blog post is for general information purposes only and does not constitute legal or financial advice. Your rights and options will depend on your individual circumstances and the terms of your agreement.