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Last updated:Sep 24, 2024
Verity Hogan
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First published on: Feb 11, 2022

HP vs PCP: Which is right for me?

HP vs PCP is the big debate in car finance. They’re two of the most popular ways to spread the cost of buying a new or used car and have many similarities, as well as some significant differences.
 
The important thing to remember when comparing your car finance options is that there’s no one-size-fits-all. The best option for you will depend on a whole range of factors, from how important being a car owner is to you and how far you drive each year to how much you want to pay each month.
 
Our guide is here to help you make up your mind.

What are the differences between HP and PCP?

 

Hire Purchase (HP)

Personal Contract Purchase (PCP)

No deposit required

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Car is yours at the end of the agreement

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Optional

 Agreement length

1 to 6 years

1 to 5 years 

Fixed monthly payments

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No (final) balloon payment

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Cancel

No excess mileage charges

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Cancel

Secured against
the vehicle

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Available on Carmoola

 check green Cancel

This table outlines key features of typical PCP and HP agreements and may not represent all agreements available. Speak to the lender to understand specific details of the agreements they provide.

What is HP finance?

Hire Purchase – or HP – is one of the most popular types of car finance and, like PCP, it lets you spread the cost of your new or used car over a set period.

You’ll usually need to put down a deposit upfront and then make fixed monthly repayments (including interest) for between one and six years, depending on the length of your agreement.

how-hp-finance-works

During the loan term, you’ll be the car’s registered keeper, but the lender will remain its legal owner. That means you’re responsible for footing the bill for its running costs and general maintenance, but you can’t sell or modify the car. Those flash alloys might have to wait for now.

The good news is that, once you’ve reached the end of the agreement, all the payments are made, and you’ve paid the small Option to Purchase fee, the car will be all yours. Congratulations, you’re officially the car’s owner!

Sounds good? HP finance does have its advantages, but there are also disadvantages that it’s worth considering before you make up your mind:

Pros
Cons

Pros

  • Your monthly payments will usually be fixed throughout the agreement
  • You won’t typically have to agree to an annual mileage restriction
  • You’ll become the car’s legal owner at the end of the agreement
  • HP finance can be more accessible to people with poor credit scores

Cons

  • You might need to put down a deposit
  • You won’t own the car until you’ve made all your loan repayments
  • You won’t be able to sell or modify the car during the agreement
  • Monthly payments can be higher than other types of car finance like PCP

 

More car finance guides

What is PCP finance?

Personal Contract Purchase – or PCP for short – is a way of financing a car that spreads the cost of buying a new or used car over a set period. You’ll usually put down an initial deposit upfront and then make fixed monthly repayments throughout the loan term. 

Most PCP deals last between two and four years, but the big difference with this type of finance is that it gives you options. At the end of the loan term, you can:

  • Buy the car by paying the one-off balloon payment
  • Hand it back to the lender and walk away
  • Use any positive equity built up as a deposit in a new finance agreement

how-pcp-works

This flexibility, along with the relatively low monthly repayments that come with PCP compared to other finance options, have boosted its popularity in recent years.

The deposit

Most PCP deals will ask you to put a deposit down upfront. The amount is up to you (and how much you can afford), but around 10% of the car’s purchase price is usually considered a reasonable deposit.

The monthly payments

You’ll then make fixed monthly payments throughout the loan term. These payments will be calculated so they cover the amount of value your car will lose in this time. That’s the difference between its current value and its estimated future value (its Guaranteed Minimum Future Value or GMFV for short). As you won’t be borrowing the full purchase price, repayments can be lower than other options like HP finance. 

The balloon payment

If you’ve fallen head over heels for your wheels during the loan term, you can choose to buy it when your agreement ends. You’ll need to pay a one-off balloon payment, which is the amount outstanding on the loan and usually equivalent to the GMFV.

Like any type of finance, there are advantages and disadvantages to PCP that might help you make up your mind:

Pros
Cons

Pros

  • Your monthly payments can be lower than other types of finance
  • You have options at the end of your agreement
  • You might be able to afford a newer or higher spec car
  • You can change car every few years

Cons

  • You won’t become the car’s legal owner unless you pay the balloon payment
  • You’ll likely have to agree an annual mileage limit
  • You’ll face extra charges for any damage to the car beyond standard wear and tear
  • Your car can be repossessed if you don’t keep up with your repayments

Is HP or PCP right for me?

There’s no right or wrong choice when deciding between HP and PCP; the best option for you will always depend on your personal preferences and individual circumstances.

HP might be the best option if:

  • You want to own your car
  • You want to keep the same car for several years
  • You drive a lot of long distances
  • You’ve missed payments in the past and have a poor credit score

PCP could be a better fit if:

  • You want the flexibility to choose whether to become the car’s owner or not
  • Low monthly repayments are your priority
  • You love driving newer models and like changing car regularly
  • You tend to drive a similar number of miles each year

FAQs about HP and PCP Finance

Is it better to own a car or have a PCP agreement?

It all depends on your personal preferences and current circumstances. Car ownership might be better than a PCP agreement if you plan to keep the same car for a long time and don’t want to worry about mileage restrictions when you’re planning your next big road trip.
 
On the other hand, a PCP agreement might be the better option if you like changing car regularly, don’t want to deal with selling or part-exchanging it in the future, and tend to drive a similar number of miles each year. The flexibility offered by PCP does come with some restrictions, but it can also suit some people better than traditional car ownership.

Is HP or PCP better?

In the great battle between HP vs PCP, we’re calling it a draw. There are pros and cons to both options and the best choice for you will come down to your personal preferences, priorities, driving habits, financial circumstances, and the car you’ve got your eye on.

Do I own my car at the end of HP or PCP agreements?

Yes, HP finance does lead to car ownership at the end of your agreement. Once all your payments are made, you’ll usually need to pay a small fee called the Option to Purchase fee. Once that’s all sorted and the paperwork is complete, the car will be all yours.
 
With PCP, you’ll only own the car if you choose to pay the one-off balloon payment. As this can cost a few thousand pounds, you could pay out of your savings or take out a new loan to cover it.

When can I change my car on HP or PCP agreement?

Whether your circumstances have changed, you need new wheels to fit your new lifestyle, or you’re just bored of your current car, there are ways to change a car bought on finance.

With both PCP and HP agreements, you can either wait until you reach the end of your loan term to change your car or end your finance early to change it up sooner.

With HP, once you’ve come to the end of your loan term, you’ll be the car’s legal owner. That means you’re free to sell it or part-exchange it for a new set of wheels. With PCP, at the end of your loan term, you can simply hand it back to the lender and walk away or use any positive equity as a deposit in a deal for a new car.

If you choose to end the finance early, you’ll need to pay the settlement figure to become the car’s legal owner. You can then sell, modify, give away, or part-exchange the car – essentially, the choice is yours!

Can I end my finance early with either finance type?

Yes, if you need to end your HP or PCP agreement early for any reason, you have options:

14-day Cooling Off Period - when you sign a car finance agreement (no matter whether it’s HP or PCP), a 14-day cooling  off period will automatically be built into the terms and conditions. This is your legal right to withdraw or cancel the contract within 14 days of signing it. You’ll need to give notice to the lender, but shouldn’t need to give any reason for your decision. 

Settlement Figure – you can settle your finance at any time by requesting a settlement figure from your lender. This will usually be made up of any remaining payments, minus future interest, and including your final balloon payment in a PCP. Once this amount is paid, you’ll be the car’s legal owner. An early termination charge might also apply. 

Voluntary Termination – under the Consumer Credit Act 1974, you have the right to voluntary termination of your finance agreement once you’ve paid 50% of the total amount payable. In a PCP loan, this includes your balloon payment. If you’ve not yet reached this threshold, you can choose to pay the difference. Once the agreement is terminated, you can simply hand the car back and walk away.

What other car finance ownership options are available?

If PCP or HP aren’t ticking all your boxes, you might want to consider:

Leasing – also known as Personal Contract Hire or PCH – is a lot like a long-term car rental and rarely ends in car ownership.

  • Lease agreements usually last between two and four years and you’ll pay a fixed monthly payment during this time.
  • You’ll typically need to hand the car back at the end of your lease.
  • An upfront deposit is usually required.
  • You’ll likely have to keep the vehicle in good condition and agree an annual mileage limit.

Personal Loan - Personal loans differ from other forms of finance as they aren’t secured against the car. Instead, you’ll become the car’s legal owner as soon as you use the loan to pay the dealership or private seller.

  • As its legal owner, you can modify or sell the car during your agreement, just make sure you continue making your monthly loan repayments.
  • The increased risk to lenders of issuing an unsecured loan means personal loans are often available only to people with strong payment histories and good credit scores.
  • Monthly payments can be higher than other finance options.

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Representative Example
Loan amount £10,000
Interest rate 13.9% APR
54 payments of £246
Total cost of credit £3,284
Option to purchase fee £1
Total payable £13,285

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