What is PCP?
Personal Contract Purchase (PCP) is a type of car finance that lets you spread the cost of a new car. You put down a deposit and then pay monthly instalments, plus interest, over a fixed period – usually two, three or four years.
With a PCP agreement, your monthly repayments can be lower than if you took out a personal loan or HP financing. This is because you’re not actually repaying the price of the car. Instead, your deposit and monthly repayments only cover the car’s depreciation – its fall in value – while you have it.
When your PCP deal comes to an end, you usually pick one of three options:
Return the car
Trade it in for a new model using a new PCP agreement
Buy the car outright with a final 'balloon' payment.
Find out more: how PCP works
What is HP?
Hire Purchase (HP) can be one of the simplest ways to finance a car.
After you put down a deposit, you then pay off the full value of the car, plus interest, in monthly instalments over a set period. Once you make the final payment, the car is yours to keep.
With HP, your monthly repayments will probably be higher than for PCP car finance. This is because you’re paying off the full cost of the car and there’s no final balloon payment to make at the end of the agreement.
Instead, you only need pay a small ‘option to purchase’ fee – usually around £100 – and you’ll own the vehicle outright.
Find out more: how HP works
What are the differences between HP and PCP?
If you’re weighing up the pros and cons of car finance, the main differences between HP and PCP are:
You won’t own the car at the end of a PCP agreement unless you make a balloon payment. This final balloon sum can often be quite large. With HP, you’ll own the car when you hand over a final small fee, typically £100.
PCP deals often have mileage restrictions, whereas HP doesn’t. If you drive more miles than agreed at the start of your PCP, you may have to pay an excess mileage penalty fee. This can typically be anywhere between 5p to 25p per mile over your limit, depending on your car and contract.
You can also be charged for damage, and excessive wear and tear, at the end of a PCP agreement. While minor scuffs, light scratches and paint chips won’t usually trigger a fee, a big dent or damage to the car’s body will. There’s no such charge with HP.
You can return the car at the end of a PCP agreement, take out a new deal on another vehicle or pay a balloon payment to buy it outright. At the end of an HP deal, the car is yours to do whatever you like – keep it or sell it.
As well as differences, there are some similarities too. With both HP and PCP:
You need to pay a deposit
You have to undergo a credit check
Monthly repayments are fixed
The loan is secured against the car.
How much does a car cost on HP vs PCP?
The following table gives you a rough idea of how much a £20,000 car could cost you on HP vs PCP finance. It assumes you put down a £2,000 deposit and borrow £18,000, to be repaid over 36 months at 9.9% APR.
Our example is for illustrative purposes only. The APR you could get depends on factors including your credit score and financial situation.
HP | PCP | |
|---|---|---|
Monthly repayments | £576 | £317 |
Final option to purchase fee (HP) or balloon payment (PCP)* | £100 | £11,060 |
Total cost of car | £22,760 | £24,163 |
*Depreciation assumed by our partner Car Finance 247’s calculator. Balloon payment is optional - you could instead return the car or trade it in for another one under a new PCP agreement. Numbers rounded.
As you can see, the monthly repayments on a PCP agreement are much lower than an HP agreement. However, you’ll need to pay out a hefty chunk at the end of your contract to cover the final balloon payment if you want to buy the car at the end of the agreement.
Even with larger monthly repayments, the total cost of financing your car could work out cheaper on an HP agreement.
PCP or HP: which is better for me?
Whether PCP or HP is better for you largely depends on your personal preference and financial situation.
PCP may be right for you if:
You like to change your car every few years
You’re concerned about the car’s likely depreciation
You’re not sure if you’d like to keep the car or return it at the end of the deal
You feel more comfortable with lower monthly repayments.
HP may be right for you if:
You want to own the car after the agreement has ended
You can comfortably afford the higher monthly repayments
You travel a lot and don’t want to be restricted to a set number of miles
You don’t want the worry of extra charges if you damage the car.
How should I compare PCP and HP car deals?
When you compare PCP and HP car deals, pay attention to:
The APR: the higher the APR, the more you pay in interest. The APR you’ll get is determined by the lender, your credit circumstances, the amount you’re borrowing and the length of your loan.
The overall cost: the longer the loan term, the longer you’ll pay interest for. This could make a significant difference to the overall cost of the car finance.
Where can I compare PCP and HP car finance deals?
If you’re ready to take the next step, you have options when it comes to comparing PCP and HP car deals. You could:
Compare car finance deals through a comparison site such as Compare the Market. We’ve partnered with Car Finance 247, a leading car finance broker, to help you find the right PCP or HP car finance deal for your credit circumstances.
Talk to the dealer (and try to negotiate). They’ll typically offer various car finance deals, including PCP and HP agreements. However, you’ll be limited to the cars and deals available through that particular dealership.
What other car finance options are available?
If you’re not sure about PCP or HP, and leasing’s not for you, you might want to consider a personal loan.
With a personal loan, you borrow a sum of money and pay it back in monthly instalments, at a fixed interest rate.
The interest rate you receive depends on your credit score, among other factors. You’ll own the car straightaway, so you can modify or sell it at any time.
Just be aware that the longer you have the loan, the more interest you’ll pay.
Personal loan eligibility checkerAbout Car Finance 247 Limited (Car Finance 247)
CarFinance 247 Limited (Car Finance 247) is one of the UK’s leading car finance brokers uniting buyers, car dealers and finance providers. Car Finance 247 acts as a credit broker, not a lender, which means it will show you and distribute products offered by lenders.
Advice is provided by Car Finance 247, which is authorised and regulated by the Financial Conduct Authority (653019).
Car Finance 247 is not part of Compare the Market Limited. Compare the Market receives a % of the commission that our partner Car Finance 247 earns. All applications are subject to lending and eligibility criteria.
Car Finance 247 will not charge you a broker fee should you decide to proceed with a car finance product.
Car Finance 247 is a credit broker, not a lender, and will show you products offered by lenders. To apply you must be a UK resident aged 18 or over. Credit is subject to status and eligibility.
FAQs
Can I end my car finance early?
Yes, you can end your HP or PCP finance early. Under the Consumer Credit Act, you typically have an initial 14-day cooling-off period during which you can end a car finance agreement. This is useful if you change your mind in the early days of the contract.
Further down the line, if you’ve paid off at least 50% of the loan agreement (including interest and fees) you can opt for ‘voluntary termination’. This is a consumer right that allows you to end a finance agreement early.
Alternatively, you can pay off what you owe and keep the car or sell it. Check your contract to see if an early termination fee applies and, if so, how much it will be. You may decide it’s not worth ending your agreement early unless you really must.
When can I change my car on HP or PCP?
It’s possible to change your car before the HP or PCP deal ends. You can do this either by:
Paying the outstanding amount of the loan, including any fees. This is called the settlement fee. If the car is worth more than the settlement fee, you can put the difference towards a new car. But if it’s worth less, you’ll need to pay the difference, as well as pay the deposit for your new car.
Terminating the deal after you’ve paid off at least 50% of the total finance amount. You can then start your next deal.
Compare the Market’s Editorial Team is made up of industry experts with decades of experience in personal finance, insurance and utilities. Each of our authors has an area of expertise, where they can share their extensive experience to help you get a better deal, by finding the right product and saving money.
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