The Difference Between PCP vs HP Explained

What is the difference between hire purchase vs personal contract purchase? It’s a question posed by many car buyers, and we're here to answer your questions. This article will cover the differences between PCP and HP loans, what that means for you, and provide important information to help you can make the right decision about the best car finance for your next purchase.

If you'd rather watch a video Kathryn provides a detailed explanation of the differences between PCP vs HP 👇

What's the Main Difference: HP vs PCP finance? 🧐


What is PCP? 🚙

With PCP (personal contract purchase), you only borrow a proportion of the cost of the car. You agree to fixed monthly repayments over a set period of time (usually two or three years), which are calculated based on the 'Guaranteed Minimum Future Value' of the car at the end of the contract. Once the contract comes to an end, you can choose to pay the GMFV (often referred to as a balloon payment), or you can hand the car back with no fuss.

What is HP? 🚙

For many, an HP (hire-purchase) agreement is more simple. It‘s like a traditional loan, and you'll pay back the total cost of the car over a set period of time (this can be from one to five years, or sometimes longer). It’s a bit like a mortgage on a house, in that you usually pay a deposit and then make monthly payments until the loan is paid off. 

If you only remember one thing from this article it should be this: with an HP agreement, you own the car at the end. With a PCP agreement, you don't own the car, unless you pay the final balloon payment.

PCP Finance Deals ✅

PCP often looks appealing, as the monthly payments are typically lower than HP. PCP deals are more common for new cars, or nearly new cars, and you can find some great deals.

However with PCP at the end of the payments you have to give the car back. Unless you pay the 'Guaranteed Minimum Future Value' (balloon payment) and then can keep the car. This amount is fixed at the beginning of the deal on what the dealer thinks the car will be worth at the end of the contract.

Why is PCP popular? 🕺

Many car buyers would never dream of being able to afford a brand new car, but PCP has made this an affordable option for drivers, with almost 91% of new car buyers opting for PCP financing. And don't forget that with a new car, you'll also get other perks like a warranty against faults and issues, so no need to worry about costly repairs. 

PCP finance was first introduced into the UK in 1992 by Ford. It was immediately popular, and many other car manufacturers quickly jumped on the bandwagon, keen to stay competitive. Today, PCP is a common form of financing. 

Key Features of PCP

To make it super clear, here's a breakdown of the components of PCP finance:

  • You pay an upfront deposit ✅
  • Sometimes the dealer will also contribute to the deposit ✅
  • Decide on a term for the agreement, usually two to five years ✅
  • The dealer works out the GMFV (balloon payment) for the car after the term ✅
  • The dealer sets the interest rate based on their assessment of your creditworthiness (% APR) ✅
  • This determines the monthly payment amount ✅
  • Lastly, there's a final balloon payment (optional, if you want to keep the car) ✅

Here's an example: you buy a car that costs £25,000, and you'd like to contribute £2,000 to the deposit. There's also a dealer offer where they'll contribute £1,000. You're going to take the PCP over three years, and the GMFV of the car is £12,000. This means that the amount you'll finance is £10,000 over three years, and the APR is 8%. That means you'll pay 36 monthly payments of £393. At the end of the term, if you'd like to buy the car outright, you'll pay the GMFV of £12,000.

What If You Don't Keep the Car?

In this example, you'll be paying a total of £16,148 and then you'll give it back after the 3-year term.

- (36 months x £393, plus £2,000 deposit If you buy the car at the end of the term).

- In this example, the total cost will be £28,148, but of course, you'll have a car worth around £12,000.

- (36 months x £393, plus £2,000 deposit, plus £12,000 balloon payment)

As with all finance agreements, any deal you may be offered is subject to status and eligibility. The example above is for illustration purposes only.

Are Repairs Covered in My PCP Agreement? 🚘

Most PCP cars require you to pay for repairs unless you took out extra warranties when signing the contract on the vehicle. Some dealerships and manufacturers offer extras to repair your car should you encounter issues.

These usually include rim protection on your wheels and windscreen protection. There may also be a manufacturer's warranty in place that covers repairs for a specific amount of time. Each dealership and manufacturer differs, so it's best to check with them directly. 

Should I Buy the Car at the End of My PCP Agreement? 🚘

Ultimately this is your choice! There's no 'one size fits all' here, but we can tell you where to look. You need to work out the real value of the car when you get to the end of the agreement! ✅

To make this a little clearer, in our example above, the balloon payment is £12,000. However, if the car is: 

  • Incredibly popular
  • Rarer model
  • In good condition
  • Low mileage

It may be worth more than the dealer expected. If this is the case, buy the car. You may be able to sell it privately for more than £12,000, and make some cash  💸


This goes the other way too, and if the car is actually worth less than £12,000 on the open market, the best thing could be just to give it back 👀

Often the dealer will want to get you straight onto another PCP, so practice your best negotiating skills and push them for a great deal. 

What Are the Advantages of PCP?

The main advantages of PCP are the lower monthly repayments. This gives many consumers the flexibility to spend their hard-earned cash on other things. Another great advantage is the affordable option to have a brand new car ... and show it off to your friends of course.

New cars bring many great advantages of their own, as they're often more fuel efficient, have fewer CO2 emissions, fewer issues, and are under warranty anyway if something were to go wrong. Also, if you don't love the car by the end of the agreement, just give it back and jump onto a new PCP agreement for a new shiny car. 

What Are the Risks of PCP? 🧐

With any finance agreement, there are risks to consider. If you can't afford to keep up with the repayments then the vehicle may be repossessed. Your credit score can also be affected, and this could impact your chances of taking other finance products in the future, or the rate at which you can borrow money.

HP Finance Deals 🚙

HP, or Hire Purchase agreement, is another option you may want to consider when at car finance options.

HP essentially allows you to spread the cost of your car over a set period of time. You'll find that the repayment amount is higher on HP agreements, but if you can afford to do it, then you'll end the agreement with an asset worth several thousand pounds, and the option to part exchange your car when you get a new one 🕺

At the end of your agreement, you won't find a large balloon payment, but you will need to pay the Option to Purchase fee, which essentially transfers legal ownership of the car to you. For some lenders, this could be around £100, however with Carmoola we keep it nice and simple at just £1 😊

Key Features of HP

Here are the components of HP agreements:

  • You can pay an upfront deposit payment (but some lenders offer zero deposit options)
  • Decide on a term for the agreement, usually two to five years
  • There will be an interest rate (% APR)
  • This will determine the monthly payment amount.

HP can be easier to understand than PCP. Let's look at it in terms of the same car, costing £25,000, and with a £2,000 deposit from you. On this HP agreement, we'll have an 8% APR, and we'll take the loan over three years. For this agreement, you'll pay 36 monthly payments of £721, and at the end of the term you own the car outright. Not all loans are set over three years – you can read more here about the different terms of car finance loans.

How much am I paying in total?

For an HP agreement, it's much more simple. You'll pay the 36 payments and then you own the car; that's it. So in total, the car will cost you £27,956, but don't forget that you'll also end up owning an asset worth several thousand.

(36 months x £721, plus £2,000 deposit)

Are Repairs Covered in My HP Agreement?  🛠️

Again, much like PCP, HP agreements don't tend to safeguard you against damage to the vehicle other than an initial warranty – and that may even be limited. 

The lease won't include regular services, and you may even have to take it to a manufacturer-approved garage. As with PCP, it's important to look at the fine print with the lender as each agreement could differ slightly in terms of repairs and maintenance. 

What Are the Advantages of HP? ➕

HP can seem like the responsible option. Yes, you're committing to a higher monthly payment, but it's an investment for the future. An investment in an asset that will be worth a couple of thousand pounds, and will help you as a deposit towards a new car if you wish to part-exchange it. It's a much simpler agreement to understand and offers less chance to be caught out on confusing contract jargon - something we hate here at Carmoola. 

Personal Contract Plan vs Hire Purchase 

We reckon you've got a pretty good understanding when it comes to a personal contract plan vs hire purchase agreement. Some may even call you a pro. Hopefully, you can make an informed decision about the best way to get the keys to your dream car. 

Takeaway 🍔

Both HP and PCP finance options are available to people looking to take our car loans/car finance.

🟢  HP is a simple way to purchase a car over a set period, and the car belongs to you at the end of the agreement.

🟢  With PCP, you borrow a portion of the car's cost and agree to fixed monthly repayments over a set period, with the option to pay the final balloon payment to own the car or hand it back. PCP has become a popular option for those who may not have otherwise been able to afford a new car.

It's essential to consider the terms of the agreement and whether it's the right choice for you. As with all financial agreements, it's important to understand the terms, conditions, and costs before making a decision ✅

If you feel well informed and think this article could help other potential car buyers, give it a share and spread the Carmoola love ❤️