What's the difference between PCP and HP car finance?
Personal contract plans and hire purchase have similarities but there are also key differences. Our guide can help you decide which route may suit you best for your new car
Key takeaways:
Ownership of HP vehicles only transfers to you after completing all payments
PCP repayments tend to be lower than HP or personal loans but it may come with potential mileage limitations and wear-and-tear costs
Pay attention to the APR and look beyond the monthly payments
How does HP work?
Hire Purchase begins with a deposit, followed by fixed monthly payments. During this period, you're the 'registered keeper' of the vehicle, but not the outright owner—the finance company holds that title.
It's only after you've made all the payments that the car becomes yours. This method is transparent and direct, with the finish line clearly in sight: complete ownership of the vehicle.
How does PCP work?
Personal contract purchase finance shares similarities with HP in that a deposit is usually part of the deal, and the buyer is listed as the 'registered keeper.' However, the monthly payments made under a PCP agreement only cover the depreciation of the car, not its full value.
This is why the payments can be significantly lower compared with hire purchase or a personal loan.
At the end of the PCP agreement, you can either make a final 'balloon' payment to claim ownership, return the vehicle, or use any value above the 'Guaranteed Future Value' to start a new PCP contract.
What's the difference between HP and PCP financing?
While both HP and PCP finance agreements can be good ways to finance the purchase of a car, PCP often offers lower monthly payments and a variety of choices at the end of the agreement, but it may come with mileage limitations and potential extra costs for wear and tear.
On the other hand, HP is a straight road to ownership without the surprise of a final balloon payment and the need to find a big lump sum.
PCP vs HP: Which is right for me?
If you're set on owning your car and can manage higher monthly payments without worrying about mileage caps, HP could be your best bet. However, if you prefer lower monthly payments and value flexibility at the end of your agreement, PCP might be the way to go.
Hire purchase | PCP | |
|---|---|---|
Own the car from the start? | No | No |
Option to pay up front deposit? | Yes | Yes |
Fixed monthly payments during agreement? | Yes | Yes |
Car can be taken away if repayments not made? | Yes | Yes |
Car must be bought from reputable dealership? | Yes | Yes |
Option for lower regular monthly payments and a larger final payment? | No | Yes |
Guaranteed to own the car at the end of the deal? | Yes | No |
Option to return the car at the end of the deal? | No | Yes |
Annual mileage restrictions to consider? | No | Yes |
Source: Motiv
*Assumes the customer has a good or excellent credit profile
**Assumes 45% of car price
Is PCP or HP finance cheaper?
PCP might have cheaper monthly payments than a HP deal but you'll need to pay a higher final payment if you decide to own the car at the end of a PCP agreement.
| HP Example | PCP Example |
|---|---|---|
Car Price | £15,000 | £15,000 |
Deposit | £1,000 | £1,000 |
Total Borrowing (Car Price- Deposit) | £14,000 | £14,000 |
Term | 36 months | 36 months |
Representative APR* | 9.9% | 9.9% |
Monthly cost | £448.31 | £286.75 |
GMFV - FInal payment ** | N/A | £6,750 |
Source: Motiv
*Assumes the customer has a good or excellent credit profile
Do you pay more interest on PCP than HP?
Yes, a personal contract purchase (PCP) usually has more interest than a hire purchase (HP) deal for the same loan amount, term, and APR:
PCP: You pay off the difference between the car's current value and its value at the end of the contract, plus interest. This means that your balance reduces more slowly than with HP, so you pay more interest. PCP may also require a large final payment if you want to own the car.
HP: You pay off the remaining balance of the car over a set period of time with fixed monthly payments, plus interest. HP agreements don't usually include a balloon payment, so you own the car at the end of the agreement. However, HP monthly payments are usually higher than PCP.
To determine which option is best for you, you should calculate the total cost of each, including all payments and interest. Use our car finance calculator to see how much a deal could cost you.
Is PCP better than HP?
PCP may be better for people who want lower upfront costs, flexibility, or easier access to new cars. HP may be better for people who want to own the car and save on long-term costs.
HP can be cheaper over the loan's lifetime and offers benefits like no mileage limits, making it suitable for those who drive long distances. However, PCP offers lower monthly payments and flexibility for customers who prefer changing cars every few years.
Pros and cons of personal contract purchase (PCP)
Pros:
Lower monthly payments
Access to higher-end cars
Flexibility at the end of the agreement
Protection against depreciation
Cons:
Large final payment for ownership
Generally for cars over £10,000
Risk of losing the car if repayments aren't met
High maintenance standards, including an annual mileage limit
Pros and cons of hire purchase (HP)
Pros:
Ownership is guaranteed after the final payment
Suitable for buyers with poor credit
Adjustable terms
Less stringent car maintenance conditions
Cons:
Limited to reputable dealerships
Risk of losing the car for non-payment
Restrictions on selling or modifying the car
Can I get a PCP or HP deal with a poor credit score?
Yes, you can get a PCP or HP deal with a poor credit score, but it may be more difficult to get approved. Lenders will look at your credit file, affordability, and stability when deciding whether or not to give you credit.
It might be worth considering other options such as buying a used car, putting down a larger deposit to get a cheaper finance deal, or getting a guarantor who agrees to pay off the debt if you can't.
What happens if I can't keep up with my PCP or HP car finance payments?
If you don't keep up with your PCP or HP car finance payments, you could face a number of consequences, including late fees, a damaged credit score, repossession, and sometimes, legal action.
You should contact your dealer or finance provider as soon as possible to discuss options if you're having trouble making payments. They may be able to help you reduce your finance or hand the car back.
Can I get HP or PCP without paying a deposit?
Yes, some dealerships and car finance companies offer 0% car finance. PCP car deals with no deposit will often have a cheaper monthly payment than a HP no deposit contract because you're not paying off the full amount on a PCP deal.
PCP car deals with no deposit will have cheaper monthly payments than HP no-deposit deals because, with PCP finance, you're not paying the full amount of the car. At the end of the agreement, you can choose to pay the optional final payment to make the car yours.
Are there alternatives to HP or PCP finance?
Yes, there are alternatives to purchasing a car using hire purchase or personal contract purchase, including:
Personal loan
Also known as bank loans, personal loans can be used to purchase a new or used car. They offer additional flexibility because the money goes directly into your bank account leaving you free to buy whatever car you wish, including those for sale with private sellers. Car loans can offer very low interest rates, but typically those rates are only available to applicants with excellent credit scores. Find out more about your credit score with our free credit score service.
Car leasing
You pay an upfront fee to lease the car and decide the contract length and annual mileage limit. Once you take out a contract, you pay fixed monthly payments until your contract ends. After the final payment, you return the car to the dealer or take out another lease.
Credit card
While you can use a credit card to buy a car, the limit of your credit card may be lower than the cost of the vehicle. There may also be additional fees for this type of high value transaction. It's important to find a credit card with low interest and high credit limits for this type of purchase. This minimises borrowing costs while covering the price of the car. A rewards credit card is a good option, as it allows you to earn points or cashback.
How do I get the best car finance deal?
When hunting for the best car finance deal, keep these tips in mind:
Pay attention to the APR
The APR represents the total cost of borrowing. Comparing APR rates using sites like MoneySuperMarket can guide you to competitive offers.
Overall cost is key
Look beyond monthly payments and consider the total interest paid over the finance term.
Consider using your credit card
While not commonly accepted for car purchases, if possible, using a credit card can offer additional protections under Section 75.
Other useful guides
If you'd like to explore more about car finance, consider these additional guides:
Compare HP and PCP deals with MoneySuperMarket
Before making a final decision, it's wise to compare the available car finance deals. MoneySuperMarket's partner service, Motiv, allows you to do just that without affecting your credit score. By weighing your options, you can drive away with confidence, knowing you've chosen the finance route that's tailored to your needs.
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Victoria Russell
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Vikki has worked across financial services for over 20years, and for the last 15 years, created and nurtured a career within MoneySuperMarket Group, leading to her current role as General Manager for...
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