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PCP or HP?: Which car finance option is right for me?

What's the difference between PCP and HP car finance?

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Written by  Victoria Russell
5 min read
Updated: 05 Feb 2024

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

When it comes to purchasing a new vehicle, the journey doesn't end at picking the perfect model. The financial route you take to drive your chosen car off the dealership lot is equally important. Two of the most popular forms of finance for a new car are personal contract purchase (PCP) and hire purchase (HP). Both pathways offer distinct advantages and considerations. In this article, we'll delve into the intricacies of PCP and HP, helping you steer towards the option that best aligns with your financial situation and car ownership aspirations.

How Hire Purchase (HP) works

Hire Purchase is akin to a straightforward path leading to car ownership. It 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.

Man and woman in car abroad

How PCP works

PCP 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're presented with a crossroads: either make a final 'balloon' payment to claim ownership, return the vehicle, or use any value above the 'Guaranteed Future Value' to embark on a new PCP journey.

Key differences between HP and PCP 

While both HP and PCP can lead you to the driver's seat, they each have their own map of terms and conditions. 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.

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

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

Is PCP or HP finance cheaper?

When it comes to which option is lighter on the wallet, it's not just about the monthly payments. PCP might accumulate more interest over time and requires a substantial final payment if you decide to own the car. Therefore, it's crucial to calculate the total cost, including all payments and interest, to determine which is truly the more economical choice.

 

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

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. Conversely, if you prefer lower monthly payments and value flexibility at the end of your agreement, PCP might be the way to go.

 

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* 

7.9%

7.9%

Monthly cost 

£436.31 

£268.85 

GMFV / Final payment** 

N/A

£6,750 

Securing 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 term length.

  • 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.

Further reading and resources

For those who wish 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.

Embarking on the journey to a new car is an exciting venture, and choosing the right finance option is a crucial part of the process. Whether you opt for the ownership certainty of HP or the flexibility and lower monthly costs of PCP, ensure that your decision fits both your financial landscape and your automotive dreams. Happy motoring!

Embarking on the journey to a new car is an exciting venture, and choosing the right finance option is a crucial part of the process. Whether you opt for the ownership certainty of HP or the flexibility and lower monthly costs of PCP, ensure that your decision fits both your financial landscape and your automotive dreams. Happy motoring!

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