PCP vs HP car finance – which is best for you?

Published: 22 June 2023

If you want to buy a car on finance your two main options are a Personal Contract Purchase  (PCP) or Hire Purchase (HP). They’re both ways to spread the cost of buying a car over time and although they are similar, there are key differences between them. We look here at how they work to help you decide which might be the best choice for you. 

PCP finance splits the cost of your car into three – a deposit, followed by fixed monthly instalments, and an optional final payment if you want to own the car. 

At the start of the contract, you’ll pay a deposit – essentially a larger first payment towards of the overall cost of the car (rather than a returnable deposit, such as you pay when renting a property). You will be told how much the monthly amount and the final payment will be, along with any other fees that might crop up.

During the contract term, which is usually between three to five years, you pay a set amount of money, or instalment, each month. This is made up of a repayment to the car finance company plus interest. 

At the end of the agreement, you have a few choices. If you want to keep the car you’ll need to pay a small Option to Purchase (OTP) fee (usually about £10) and the final payment – known as a ‘balloon payment’ – that was set out at the start of the agreement. 

Alternatively, you can hand the car back to the lender. There won’t be any additional charges unless the car is damaged or you have exceeded the agreed mileage limit. 

Or, if the market value of the car is higher than the lender originally predicted, you can put the difference towards a new finance agreement, subject to your financial status.

HP finance has been around longer than PCP. It’s a simpler concept because it splits the cost of the car into two rather than three parts – an initial deposit followed by fixed monthly payments to a car finance company over the length of the contract. 

At the end of the contract, you become the legal owner of the car. As with PCP, there’s a small (usually £1-£10) Option to Purchase Fee to pay, and this is typically included in the final payment of the contract.

Your monthly payments will cover the cost of the car, which includes interest. As with a PCP, the deposit is simply an upfront payment that contributes to the overall cost of your car and dictates what your monthly repayments will be. The larger the deposit, the lower your monthly payments will be.

If you choose HP you will own the car at the end of the term. The monthly payments are usually higher than with a comparable PCP deal, because part of the borrowed capital isn’t deferred to the end of the contract, so there’s no lump sum to pay at the end.

With PCP, the monthly payments may be lower, but you won’t own the car unless you make a balloon payment at the end of the contract. You also have more flexibility on what to do when the contract ends.

The final amount you pay with either HP or PCP depends on the value of the car, the amount of deposit you pay, the length of the contract and the interest charged by the finance company. 

With PCP you can end up paying more overall if you keep the car – that’s because you’re making smaller payments to repay the borrowed capital each month so the outstanding amount (the bit you’re paying interest on) goes down at a slower rate.

With both PCP and HP finance you usually pay a deposit at the start. This is an initial payment towards the overall cost of the car, rather than a damage deposit of the kind you pay when you rent an item or a property.

The bigger initial deposit you pay, the lower your monthly payments will be and vice versa. You usually get to choose how much deposit you will pay, within certain limits. The default amount is usually around 10% of the car’s price but there’s usually a minimum (often £100) and a maximum amount (often 40% of the car’s price) you can pay.

Applying for car PCP finance is a straightforward process but there's a bit of paperwork (usually online) to complete. The finance provider will ask for your address history and employment/income details to make sure that you can afford all the payments. They will also carry out a credit check – it may still be possible to be accepted for PCP finance with a poor credit history but you may have to use a guarantor and your monthly payments may be higher.

You can find out how likely you are to be accepted for a car finance deal, and at what interest rate, by using an eligibility checker. These online tools are free, and they don’t leave a mark on your credit score. It’s a good way to give you an idea of your chances of acceptance before you make a full finance application.

The balloon payment is calculated by the provider working out how much it thinks the car will be worth at the end of the agreement, based on its cash price, annual mileage, depreciation and any wear and tear. This is called the guaranteed minimum future value (GMFV). 

For example, if the car is worth £20,000 now but in three years it’s expected to be worth £12,000, you will pay a total of £8,000 (plus interest), spread over monthly instalments for the length of your contract. These are known as your repayments.

As with any finance agreement, there will be terms and conditions you’ll have to follow with a PCP, including sticking within an annual mileage limit. During the contract, you’ll then be what’s known as the ‘registered keeper’ of the vehicle, and you won’t actually own it.

When the contract ends you then have three options. You can make one final payment to keep the car, you can give the car back and end the contract completely, or you could part-exchange it and start a new PCP contract with a different car.

It’s important to remember that if you hand back your car at the end of the contract, you could be liable for charges if it needs repairs or if you exceeded the agreed mileage limit. Normal wear and tear is allowed – there are industry standards for this based on a car’s age and mileage – but anything beyond this could incur a charge.

If you want to end a PCP deal early – because you no longer need the car or you can’t afford the repayments, for example – then you have options.

If you’ve already paid for at least half the cost of the car, or you can pay at least half to the car finance provider, you have the right to return your car under what’s called ‘voluntary termination’ under the terms of the Consumer Credit Act 1974. 

If you’ve paid more than half the cost of the car, you can still end the contract, but you won’t be refunded anything. You also have the option of ending the contract early by paying a settlement figure that allows you to either keep the car, to sell it or part exchange it for a new car.

Pros

• Comparatively low monthly payments 

• Can make a newer car more affordable

• Choice of options at the end of the contract

Cons

• If you want to own the car at the end of the agreement, you’ll need to pay a lump sum and any option to purchase fees

• Cars are subject to an annual mileage limit

• Can cost more overall than HP if you want to own the car at the end of the contract

• Usually only available to those with a good or excellent credit rating 

• Will leave a hard credit check whether you are successful with your application or not

You want low monthly payments, you’d like to drive a car that may be out of your budget to buy upfront, you’re happy with the annual mileage limit and if you want the flexibility of having options at the end of the term.

• Can I get car finance with bad credit?

• Can I end a car finance agreement early?

• How to save money on car ownership

The process of applying for HP finance is much the same as applying for PCP finance. The finance provider will want details of your address history, employment and any other income and they’ll carry out a credit check. As with PCP, it may be possible to be accepted for HP finance with a bad credit history but you may have to use a guarantor and your monthly payments may be higher.

Again, it’s worth using a free online eligibility checker to find out how likely you are to be accepted for a car finance agreement, and at what interest rate, before you make an application.

Over the course of an HP contract you are the car’s ‘registered keeper’, just like a PCP contract. But with an HP agreement, once the Option to Purchase Fee has been paid – which is typically within the final payment of the contract – you then become the owner of the car. Unlike a PCP, there are no mileage restrictions with an HP finance agreement.

You can return an HP car early if you’ve paid for at least half of it, or you can make this payment to your finance provider. 

If you decide to pay the entire contract off early – ie, to settle the agreement – then the amount a provider can charge you is capped. This is legally defined in the Consumer Credit Act 1974 and the most you can be charged is whatever is left of the loan (without interest) plus the lowest of the following: 

• 1% of the amount repaid early 

• 0.5% of the amount repaid early if there are fewer than 12 months remaining on the contract  

• the remaining interest

You can also, as mentioned above, offer the car as part exchange to a dealer for deposit towards a new car, once any outstanding finance has been paid off.

Pros

• You own the car at the end of the contract (once all payments and the option to purchase fee has been paid)

• No mileage limit

• Can work out cheaper overall than PCP

Cons

• Monthly payments are usually higher than with PCP

• You don’t own the car until you’ve made the final payment

• There are limits on things like modifications made to the car before you can own it

• Applications for HP will leave a hard credit check on your files whether you are successful with your application or not

You can afford higher monthly payments than with a PCP, you don’t want an annual cap on your mileage and you want to own the car at the end of the deal.

You’ll find lots of used cars for sale at Cazoo, all available to buy through our trusted dealers.

Cazoo makes selling a car just as easy – just enter a few details for an instant online valuation. If you accept the offer our partners will get in touch to arrange payment and collection of your car at a time that suits you.