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PCP or HP?

Which car finance option is best for me?

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

By Lucy Hancock

Published: 25 August 2021

Man and woman in car abroad

Compare with our partner, Motiv

When you’re eyeing up a new set of wheels the first step is deciding how you’ll fund your purchase. Both personal contract plans (PCP) and hire purchase (HP) are types of car finance which involve making monthly repayments.

With HP you’re technically paying to hire the car and will only own it after making the final payment. For personal contract purchase you’ll pay monthly payments on a portion of the car’s value and have the option to make a higher final payment - called the ‘balloon’ payment - at the end of the deal to keep the car. Alternatively, you can return your vehicle and take out a new arrangement on a different car.

How do hire purchase and personal contract plans work?

PCP and HP are both types of car finance, which in simple terms means paying for the car with credit (rather than in cash) and paying it back over time. They both work in the following way:

  • A deposit: For PCP and HP you’ll usually need to put down a deposit. This will depend on the car finance company though, so make sure you check
  • Registered keeper: You’ll be the ‘registered keeper’ with both PCP and HP, but the finance company will own the car until you’ve finished making your payments
  • Secured to the car: If you fail to keep up with your repayments the finance company may take the car away
  • Fixed monthly repayments: You’ll pay off the credit owed in regular monthly repayments throughout the term of the agreement
  • Car type: PCP and HP are usually on offer for newer cars with low mileage. But the rules will vary between PCP and HP deals and the company you’re borrowing from

How is PCP different to HP?

PCP differs from HP in the following ways:

Lower regular payments

Your regular monthly repayments will be lower than with HP for the same car with the same interest rate. This is because you only pay the expected deprecation on the car

Options at the end of the agreement

  • Keep the car: Make a large final payment (often called a balloon payment) and take ownership of the car
  • Trade the car: The car may be worth more than the final payment, in which case you can use the extra value as a deposit towards a different car
  • Return the car: You won’t make the final payment and simply hand the car back to the finance company

Excess mileage restrictions

The agreement will be based on you sticking to a maximum number of miles per year that you will agree with the finance company up front. If you go over this and want to return the car, you’ll need to pay for any miles you do over the agreed mileage. In some cases this can be quite costly so watch your mileage.

What are the key features of PCP and HP?

The following table compares the main features of PCP and HP:

 
Personal Loan 

 

Hire Purchase 

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

How much would a car cost using PCP compared to HP?

Assuming you choose to keep the car at the end of the deal then the total cost of a PCP will include the regular monthly payments, any up-front deposit you choose or are required to put down and the larger final - or balloon - payment. Despite PCP typically offering lower regular monthly payments, in the long run it can be a more expensive way of buying a car. This is because the lower monthly payments mean the balance on your finance will reduce more slowly and so you will end up paying more interest compared with a HP deal at the same interest rate.

The table below shows an example of the comparative costs of PCP and HP for the same value car:

 
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 

Source: Motiv

*Assumes the customer has a good or excellent credit profile

**Assumes 45% of car price

What are the advantages and disadvantages of PCP?

You’ll need to weigh up various factors to help you decide which car finance type is best for you. The advantages and disadvantages of PCP include:

Advantages:

  • Significantly lower monthly payments compared with hire purchase or a personal loan
  • Lower payments could make a more expensive car fit within your monthly budget
  • You’ll have flexibility at the end of the deal with the options to either hand the car back or take full ownership

Disadvantages:

  • You won’t automatically own the car at the end of the agreement without paying the final payment, which will usually be a few thousand pounds
  • PCP is usually only available on cars that are for sale for £10,000 or more
  • PCP is secured on the car – which means it could be at risk if you fall behind on repayments

What are the advantages and disadvantages of HP?

The advantages and disadvantages of HP include:

Advantages:

  • Once the agreement is completed you own the car
  • Can be a good option to consider if you have a history of missed repayments or CCJs – where other options like a personal loan are either unavailable or more costly
  • You can often flex the term of the deal before you sign, to reduce monthly payments or the overall cost – depending on your requirements

Disadvantages:

  • Only available if the car is being sold by a reputable dealership
  • HP is secured on the car – which means the car could be at risk if you fall behind on repayments
  • You won’t be able to sell or modify the car during the term of the agreement

How do I decide between buying a car with PCP or HP?

When deciding between PCP and HP you’ll need to weigh up what is the right option for you and your financial situation. Work out what you can afford in monthly repayments and think about whether you want to own the car at the end of the deal or if you’re happy to trade it in or hand it back.

If you definitely want to own the car at the end and can find a HP deal that fits within your monthly budget, then HP will likely be a more affordable option overall (if there’s no difference in interest rate).

But if you’re struggling to meet your budget requirements with HP or you think you may want the option to the return the car at the end of the deal and trade in for a new car, PCP may be a better choice for you.

 

Other helpful car finance guides

There’s lots more useful information about your car finance options in our guides: 

Hire purchase vs leasing

Car finance versus personal loans

Compare car finance deals

You can compare car finance deals with our partner Motiv. It’s an online service that allows you to see if you’re eligible for HP and PCP deals and the rates you’ll pay.

It only takes a few minutes to enter your details and compare offers, it is free and searching for a deal won’t harm your credit score.