Most new cars in the UK are bought on finance, and PCP (Personal Contract Purchase) and HP (Hire Purchase) are the two most common types. They look similar but work very differently. PCP offers lower monthly payments but you don't own the car at the end. HP costs more per month but you own the car outright when finished. Neither is universally better: it depends on your priorities. You can model monthly payments with our car finance calculator.
How PCP Works
With PCP you pay a deposit, then monthly payments over 2 to 4 years. At the end, you have three options: (1) hand the car back with nothing more to pay (if under the agreed mileage), (2) pay a 'balloon payment' (Guaranteed Future Value) to own it outright, or (3) use any equity (if the car is worth more than the balloon) as a deposit on a new PCP. Monthly payments are lower because you're not paying off the full car value, just the depreciation during the agreement period.
How HP Works
With Hire Purchase you pay a deposit, then monthly payments spread over the full car price (minus deposit) plus interest. When the final payment is made, you own the car: no balloon payment, no decision to make. Monthly payments are higher than PCP for the same car and term because you're paying for the whole vehicle, not just the depreciation.
- PCP: lower monthly payments, balloon at end, no guaranteed ownership
- HP: higher monthly payments, full ownership at end, simpler
- Both: you don't legally own the car during the agreement
- Both: the finance company can repossess if you miss payments
Total Cost Comparison
PCP's lower monthly payments can look attractive but are deceptive. The balloon payment often surprises people at the end. Illustrative example: £25,000 car, 20% deposit (£5,000), 48-month term at 6.9% APR. On HP you would pay about £476 a month, about £27,850 in total including the deposit, and own the car. On PCP with an assumed £10,000 balloon, you would pay about £294 a month, and about £29,100 in total if you pay the balloon to keep the car. Real quotes vary with the APR, fees and the balloon the lender sets. If you always hand the car back and take a new PCP, you're permanently renting and the true cost over a decade is significantly higher than HP.
Can I pay off PCP or HP early?
Yes. Under the Consumer Credit Act you can settle early and get a rebate of future interest. On both PCP and HP you also have a right of 'voluntary termination': once you have paid half of the total amount payable (including interest and fees), you can hand the car back with nothing more to pay, provided it has been reasonably looked after.
What's the cheapest way to buy a car?
Cash is cheapest (no interest). After that, a 0% finance deal on a new car (if you can get one) costs nothing extra. Otherwise, HP at the lowest available APR typically beats PCP on total cost if you want to own the vehicle.
Mileage Limits and Condition Charges
PCP agreements come with mileage limits, typically 8,000 to 12,000 miles a year. Exceed them and you pay a penalty per mile (often around 10p to 15p a mile). Damage beyond 'fair wear and tear' also incurs end-of-contract charges. These hidden costs can make PCP significantly more expensive in practice. HP has no such restrictions: once it's yours, drive and use it however you want.
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