The three ways to finance a car
Hire purchase (HP). You pay a deposit, then equal monthly payments that cover the whole price plus interest. The car is yours after the final payment, plus a small option-to-purchase fee.
Personal contract purchase (PCP). You pay a deposit, then monthly payments that cover only the car’s expected depreciation plus interest on the whole amount. At the end you choose to:
- pay the balloon (the Guaranteed Future Value) and keep the car,
- hand it back and owe nothing more, as long as you’re within the mileage limit and it’s in fair condition, or
- part-exchange it for a new car, using any equity above the GFV as a deposit.
Personal loan. You borrow from a bank, pay the dealer in full and own the car immediately. You can sell it whenever you like.
Worked example: £25,000 car, £3,000 deposit, 4 years
At a dealer APR of 9.9%, with a £9,500 balloon, compared with a personal loan at 6.9%:
| Product | HP | PCP | Personal loan |
|---|---|---|---|
| Monthly payment | £552.47 | £388.93 | £523.67 |
| Total payable (owning the car) | £29,529 | £31,179 | £28,136 |
| Cost of credit | £4,529 | £6,179 | £3,136 |
PCP has the lowest monthly payment by far, but if you pay the balloon to keep the car it’s the most expensive option. That’s because you pay interest on the balloon for the whole term. If you hand it back, you’ll have paid £21,669 to use a £25,000 car for four years.
APR vs flat rate
Some quotes show a flat rate: interest worked out on the original loan for the whole term, even though you’re paying it down. A flat rate looks roughly half the true APR. The HP deal above has an APR of 9.9% but an equivalent flat rate of just 5.13%. By law dealers must show the APR, so always compare APRs.
Choosing the right option
- Want the lowest monthly payment and a new car every few years? PCP. Budget for the balloon if you might keep the car.
- Want to own the car at the end? Compare HP with a personal loan. A loan is often cheaper with good credit and gives you ownership from day one.
- Drive a lot of miles? Be realistic about PCP mileage limits. Excess charges add up.
- Can you save up instead? Buying outright avoids interest entirely. See how long it would take with the savings calculator.
Before you sign
- Check the total amount payable, not just the monthly payment.
- Ask whether the deposit includes a dealer deposit contribution.
- For PCP, check the mileage limit, the excess mileage charge and the option-to-purchase fee.
- You have a 14-day right to withdraw from a regulated credit agreement.
- Under HP and PCP you can voluntarily terminate once you’ve paid half the total amount payable.
Your monthly budget
Make sure the payment fits alongside your other debts. The debt payoff planner shows how a new car payment affects your debt-free date.
Frequently asked questions
What's the difference between PCP and HP?
With HP you repay the whole car over the term and own it after the final payment. With PCP you pay off only the depreciation, then choose to pay a large balloon to keep the car, hand it back, or part-exchange it. PCP has lower monthly payments but usually costs more if you buy the car.
Is a personal loan cheaper than car finance?
Often, if you have a good credit score — personal loan rates can be lower than dealer APRs, and you own the car outright from day one. Dealer finance sometimes wins when manufacturers subsidise 0% deals.
What is the balloon payment (GFV)?
The Guaranteed Future Value is what the finance company says the car will be worth at the end of a PCP. You pay it if you want to keep the car. If the car is worth less, you can hand it back and walk away (subject to mileage and condition).
What's a flat rate and why does it matter?
A flat rate charges interest on the original amount borrowed for the whole term, so it looks about half the APR. Always compare APRs — the calculator shows the equivalent flat rate so you can spot a misleading quote.
What happens if I go over my PCP mileage?
You pay an excess mileage charge — typically 5p to 15p per mile — when you hand the car back. Underestimating by 2,000 miles a year over four years at 8p a mile adds £640.
What deposit do I need for car finance?
Often 10%, but some deals start at 0%. A bigger deposit lowers the monthly payment and the interest.
Sources
Results are estimates for education and planning, not financial advice. They depend on the figures you enter and the assumptions shown above.