PCP vs HP: Which Car Finance Is Cheaper?

Around nine in ten new cars in the UK are bought on finance, and most of those on PCP. But the lowest monthly payment isn’t always the cheapest way to drive, or own, a car.

How hire purchase (HP) works

• Pay a deposit (often 10%).
• Pay fixed monthly instalments that cover the rest of the price plus interest.
• After the last payment and a small option-to-purchase fee, the car is yours.

You don’t own the car until the end, but there are no mileage limits.

How PCP works

• Pay a deposit.
• Pay monthly instalments that cover only the car’s expected depreciation plus interest on the whole amount borrowed.
• At the end, choose to:
  1. pay the balloon payment (the Guaranteed Future Value) and keep the car,
  2. hand it back with nothing more to pay, subject to mileage and condition, or
  3. part-exchange it, using any equity as a deposit on the next car.

Side by side: a £30,000 car over 3 years

£3,000 deposit, 8.9% APR, £14,000 balloon, compared with a 6.5% personal loan:

Product	HP	PCP	Personal loan
Monthly	£853.03	£510.54	£825.24
Total to own	£33,719	£35,389	£32,709
Interest & fees	£3,719	£5,389	£2,709

PCP’s monthly payment is much lower, but owning the car through PCP costs the most, because you’re paying interest on the £14,000 balloon for three years. Handing it back means you’ve paid £21,379 to use the car.

Which is right for you?

Choose PCP if:

• you want a new car every 2–4 years
• you value a lower monthly payment
• you drive predictable mileage
• you’re unlikely to keep the car long-term

Choose HP if:

• you want to own the car and keep it for years
• you drive high or unpredictable mileage
• you want the simplest deal

Choose a personal loan if:

• you have a good credit score and can get a lower APR than the dealer
• you want to own the car from day one, which makes it easier to sell

Watch out for

• Excess mileage charges on PCP, typically 5–15p per mile
• Damage charges at hand-back beyond fair wear and tear
• Flat rates. Always compare the APR
• Long terms. Lower payments over 5 years cost more interest in total
• Gap insurance and add-ons sold with finance. Compare prices independently

Your rights

• 14-day withdrawal from a regulated credit agreement
• Voluntary termination: on HP and PCP you can hand the car back once you’ve paid half the total amount payable
• The FCA has reviewed past discretionary commission arrangements on car finance. If you had motor finance between 2007 and 2024, check whether you’re due compensation through the FCA’s redress scheme. You don’t need a paid claims firm.

Run the numbers

The car finance calculator compares HP, PCP and a personal loan with your own quote, including the balloon, option fee and mileage costs.