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
Car is yours at the end of the agreement		Optional
Agreement length	1 to 6 years	1 to 5 years
Fixed monthly payments
No (final) balloon payment
No excess mileage charges
Secured against the vehicle
Available on Carmoola

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.

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:

More car finance guides

• What is Hire Purchase (HP) finance?
• How does Personal Contract Purchase (PCP) car finance work?
• PCP vs Leasing: Which is better?
• Hire Purchase vs Leasing: Which is better?

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

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:

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