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
Two of the most popular forms of finance for a new car are personal contract purchase (PCP) and hire purchase (HP).
With HP you’re technically paying to hire the car and will only own it after making the final monthly payment.
With PCP the monthly payments only cover the car’s loss of value over time, with the option to make a higher final payment at the end of the deal to keep the car.
How does hire purchase work?
You’ll usually need to put down a deposit, but it will depend on the car lender.
You’ll then become the ‘registered keeper’ and make an agreed number of monthly payments until end of the contract.
The finance company will own the car until you’ve finished making your payments - at which point you become the owner.
How does PCP finance work?
As with HP, you’re likely to have to put down a deposit and then you’ll become the ‘registered keeper’ of the car.
You then make an agreed number of monthly payments to cover the cost of the car
At the end of the deal you have a choice to make one final, large ‘balloon’ payment to keep the car. Alternatively, you can hand it back and walk away or start another PCP deal.
What's the difference between HP and PCP?
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 depreciation on the car
More options at the end of the finance agreement: With PCP you can make a large final payment (a balloon payment) and take ownership of the car. You can also take out another PCP deal or return the car. With HP once you have made the final monthly payment, the car is yours
Excess mileage restrictions: Your PCP agreement will be based on you sticking to an agreed maximum number of miles per year. If you go over this and want to return the car, you’ll need to pay for additional miles. In some cases, this can be quite costly. Conversely, HP doesn’t have mileage restrictions
Car maintenance: Hire purchase contracts normally won’t include charges for wear and tear because the car will belong to you once the contract ends. However, with PCP contracts, you might have to pay fees for any vehicle depreciation
What are the key features of PCP and HP finance?
The following table compares the main features of PCP and HP:
| 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 |
What are the pros and cons of personal contract purchase?
Pros
Significantly lower monthly payments compared with hire purchase or a personal loan
Lower payments could mean you can afford a car that was previously beyond your budget
You’ll have flexibility at the end of the deal with the options to either hand the car back or take full ownership
Protection against depreciation as a residual value is set by the finance company
Cons
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
The car must be maintained to a high standard as it needs to be returned in good condition with no excess mileage
What are the pros and cons of hire purchase?
Here and some benefits and downsides to financing a car through hire purchase:
Pros
You own the car once the agreement is completed
Can be a good option if you've a history of missed repayments or CCJs – in which case 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
The car is not conditioned to the same standard as PCP and general wear and tear is normal
Cons
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
Is PCP or HP finance cheaper?
The total cost of PCP will include the regular monthly payments, any upfront deposit you put down and the larger final - or balloon - payment (if you decide to keep the car).
Although PCP typically offers lower regular monthly payments, this means the balance on your finance will reduce more slowly and you’ll 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
PCP vs HP: Which is right for me?
Whether HP or PCP is a better option for you will depend on your personal preference and financial situation.
HP could be a better choice if you know you’ll want to own the car at the end of the deal, don’t want to be tied to a mileage cap and can afford higher monthly payments.
PCP could be a better choice if you want to keep your options open after you’ve driven the car for the agreed term (36 months, for example). It can also be more suitable if you need to keep monthly payments low but still want to drive a new car.
Top tips for getting the best deal
Here are some things to consider when looking for your new HP or PCP contract:
Pay attention to the APR: APR is the annual percentage rate of interest on your loan. It can be worthwhile to use a comparison site, like MoneySuperMarket, to find out what APRs are available and what would be an ideal rate for you.
Consider the overall cost: You might think you’re saving money by going with a longer lease term that will offer you lower repayments, however higher monthly repayments over a shorter span of time can mean paying less interest overall.
Consider using your credit card: Most car dealers won’t allow you to pay with your credit card but if you’re given the option, it could be smart to take it. When paying with your credit card, your purchases are protected by Section 75.
Other helpful car finance guides
There’s lots more useful information about your car finance options in our guides:
Compare HP and PCP deals with MoneySuperMarket
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’s free and searching for a deal won’t harm your credit score.