HP or PCP: What’s the difference?

Hire purchase and personal contract purchase are popular ways of buying a car on finance. With both options you make monthly payments, but is HP or PCP more suitable for your situation?

Rhiannon Philps Published on 30 September 2020. Last updated on 15 July 2021.
HP or PCP: What’s the difference?

Lots of UK drivers use car finance when buying a new car, and hire purchase (HP) and personal contract purchase (PCP) are the two most popular ways of doing so.

You may have heard about HP and PCP, but how do they work and what are the main differences between them?

With both types of car finance you pay a deposit and make monthly payments, but the way the agreements are structured and what happens at the end of the term are different.

Read on to find out more about hire purchase and personal contract purchase, to help you decide whether HP or PCP is right for you.

What is HP finance?

HP finance – or hire purchase – is a form of car finance that allows drivers to buy new or used cars. You typically pay a deposit and repay the total value of the car plus interest in monthly instalments. The loan is secured against the car, so you won’t own it until you’ve completed the repayment schedule and paid the ‘option to purchase fee’ at the end of the agreement.

» MORE: What is hire purchase?

What is PCP finance?

PCP finance – or personal contract purchase – is a popular way of buying a car. Drivers put down a deposit and repay the finance in monthly instalments, but rather than covering the total cost of the car, the instalments cover the estimated depreciation of the vehicle. At the end of the contract you can either return the car, trade it for a new car, or make a final payment known as a ‘balloon payment’ in order to own the car.

» MORE: What is PCP car finance?

What’s the difference between PCP and HP?

With both HP and PCP car finance, you put down a deposit and take out finance, repaying it through monthly instalments. As you make repayments, the HP or PCP provider owns the car while you are just the registered keeper.

But despite these similarities, there are some major differences between HP and PCP.

One of the key differences between HP and PCP is the amount borrowers repay each month. Of course, the specifics of this hinge upon the model of the car and the amount borrowed.

HP repayments are equal to the car’s value at the point of purchase, plus interest, spread over the length of the contract term, which typically lasts from 12 to 60 months. At the end of the term, the borrower will own the vehicle.

PCP monthly repayments are typically lower than HP because the amount repaid each month doesn’t equal the initial cost of the car by the time the borrower reaches the end of the contract. Instead, the lender will estimate how much the car will be worth at the end of the contract – known as the Guaranteed Minimum Future Value (GMFV) – and the payments will cover the difference between this and the initial value of the car.

At the end of a PCP contract, the borrower has the option to purchase the car by making a final ‘balloon payment’, which is based on the car’s GMFV.

Features of HP and PCP compared

Hire purchase (HP) Personal contract purchase (PCP)
Typically available on new and used cars. Mainly available on new cars; may be available for used cars that meet the provider’s age restrictions.
Usually secured with a deposit. Usually secured with a deposit.
Monthly payments cover the total cost of the car. Monthly payments are based on the difference between the initial price of the vehicle and the predicted value of the car at the end of the term. They are usually smaller than HP payments.
At the end of the contract you can return the car or pay a small ‘option to purchase’ fee to own it. At the end of the contract you can return the car or pay the balloon payment to own it. This payment is bigger than the fee at the end of HP.
Doesn’t normally come with any mileage restrictions. Comes with mileage restrictions and you’ll need to return the car in good condition or face extra charges.

Should I choose HP or PCP?

Whether HP or PCP is best for you will depend on your individual situation and your personal preferences.

You might consider HP if:

  • You know you want to own the car at the end of the contract. Overall, the total cost of HP will likely be less than the total cost of PCP (if you make the balloon payment).
  • You don’t want to pay a big ‘balloon payment’ at the end of the term to own the car.
  • You can afford the monthly repayments.
  • You don’t want any mileage limits.

However, you may want to consider PCP if:

  • You want to drive a new car and regularly upgrade to a newer model each time.
  • You want more flexibility at the end of your contract.
  • You are more likely to return the car rather than wanting to own it at the end of the contract.
  • You can afford to pay the balloon payment at the end of the contract if you do want to own the car.
  • You want lower monthly repayments. PCP payments are often smaller than HP payments.

Bear in mind that HP and PCP aren’t your only options for getting a car. You may want to buy a car outright with cash, take out a personal loan, or even lease a vehicle. Whatever you decide, make sure you research and weigh up all your options and compare products from different providers to help you find the best deal for you.

» COMPARE: Find car finance deals

Image source: Getty Images

About the author:

Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more

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