By Tia Harrison-North
Last updated: 11 April 2025
PCP vs. HP is a common search for anyone looking for the best type of car finance. In reality, there isn’t really a ‘best’ option – just one that matches your needs better.
And before jumping into any car finance deal, it’s important to understand exactly what you’re signing up for.
Personal Contract Purchase (PCP) and Hire Purchase (HP) can be helpful ways to spread the cost of a car across a few years, but you need to make sure you understand the details of any agreement.
Our guide will run you through the benefits and things to consider for both types of finance. Keep reading to get up to speed.
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What is PCP?
PCP, or Personal Contract Purchase, is a type of car finance agreement that allows you to spread the cost of a car. You make monthly payments across an agreed term and then pay a final ‘balloon payment’ at the end of your contract.
If you don’t want to pay the balloon payment, you can choose to return your car at the end of your contract. Just keep in mind that you might have to pay extra fees if your car is damaged beyond ‘fair wear and tear’ as agreed in your contract.
How does PCP work?
You’ll first apply for a car finance deal based on the car you’re after, choosing terms like your deposit, the length of your contract and annual mileage
If you’re accepted, you’ll then make your first payment – the deposit you applied with (unless you choose a no deposit option)
After the deposit, you’ll start making monthly repayments until the end of your contract
During your contract, you’ll need to stick to an annual mileage allowance and maintain the condition of your car (damage beyond ‘normal wear and tear’ can lead to extra charges, but this’ll be detailed in your agreement)
Once you’ve made all your monthly payments, you can either pay the final balloon payment and own the car or return your car
Main benefits of PCP
Gives you the option to hand the car back at the end of your contract
You can skip the upfront cost of buying a car outright
Fixed monthly payments across your contract
No worries about depreciation if you plan to hand back the car
You’ll know your balloon payment amount when you sign your contract
Main considerations of PCP
You’ll usually still need to pay an initial deposit
There will be excess mileage charges if you go over your allowance
You’ll need to pay a balloon payment (usually more than your monthly payments) if you want to keep the car
You will typically need to get fully comprehensive insurance
You can’t modify or sell the car until you’re the official owner after making that balloon payment
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What is HP?
Hire Purchase (HP) is another type of car finance that works in a similar way to PCP, but there are a few key differences.
You’ll make an initial deposit and then monthly payments of a fixed amount until the end of your contact.
Instead of a final balloon payment, you might make a small ‘option to purchase’ payment within your final monthly payment – depending on the type of agreement. At that point, your contract ends and you’re the owner of the car.
How does HP work?
Apply for car finance based on the car you hope to buy, choosing the terms of your contract (deposit, term length, etc.)
If you’re accepted, you’ll then pay the initial deposit you agreed
Begin your monthly repayments and continue paying until the end of the agreement – keeping within the mileage and wear and tear limits of your contract
Make your final repayment that may also include your small ‘option to purchase’ fee (unless you choose a conditional sale agreement, which doesn’t include an option to purchase fee)
Once everything is paid, you now own the car
Main benefits of HP
Your monthly payments will be fixed
You’ll own the car at the end of your payments
Lenders will sometimes offer HP to those with low credit
Typically no mileage restrictions – so no excess mileage charges
Main considerations of HP
You’ll still need to pay an initial deposit
Often an ‘option to purchase’ fee (if you didn’t choose a conditional sale agreement
Monthly payments are usually higher than PCP as you don’t have a final balloon payment
You won’t own your car until the final payment
You can’t modify or sell the car until you’ve made the last payment
Differences between PCP and HP
While PCP and HP are both types of finance agreements that do have some things in common, they also have some pretty big differences.
Payments and costs
One of the main differences between PCP and HP are the final payments. The balloon payment at the end of a PCP contract is typically much higher than the option to purchase fee at the end of an HP agreement.
PCP balloon payments are based on ‘residual value’ (RV) or ‘Guaranteed Minimum Future Value’ (GMFV), which is how much the car is or is expected to be worth at the end of the agreement.
The option to purchase fee at the end of an HP agreement is basically an admin fee to cover the costs of transferring ownership to you.
This means monthly PCP payments are usually cheaper because you’re paying for the depreciation of your car across your contract rather than its full value.
However, you’ll need to make two big payments during a PCP deal (one at the start, one at the end) if you want to keep the car, so there are pros and cons for both types.
Mileage
As you can return a PCP car at the end of your agreement if you choose not to pay your optional balloon payment, the lender puts conditions in place to make sure they’re not losing out.
Car mileage directly impacts the resale value of the vehicle, so the lender will need to know an accurate estimation of your annual mileage to predict the GMFV.
If you go over this mileage and want to return your car, you’ll likely have to pay excess mileage charges.
HP car finance agreements don’t give you the option to return your car at the end of the term, so there’s no risk of excess mileage charges.
Maintaining the car
Maintaining any car is important to keep it running as it should, so always make sure you’re on top of MOTs and servicing in general.
On top of that, PCP cars come with the extra consideration of fair wear and tear if you plan to return it and not pay the final balloon payment.
Fair wear and tear are the accepted level of damages on a PCP car before extra damage fees are added.
The BVRLA Fair Wear and Tear guide lays out in detail the guidelines. It covers things like light window scratches not in the driver’s line of sight and scratches and scrapes up to 25mm. Anything over these guidelines will likely mean extra fees.
Fair wear and tear isn’t something you need to consider for a HP finance agreement, as there isn’t the option to return your car at the end of the contract.
You’re still responsible for damage on both HP and PCP finance cars, regardless of whether you’re going to return the vehicle.
If you do damage the car, you’ll need to get it fixed with a reliable garage and to a good standard.
Car ownership
PCP and HP car finance are the same when it comes to ownership. The finance provider is the owner of the car until all your payments are made and, in the case of PCP, the final balloon payment is made.
This means that you can’t make any modifications to the car before you make the final payment, and you can’t sell a finance car without taking ownership either.
End of term and equity
We’ve mentioned before that PCP and HP finance are different at the end of the agreement.
With PCP, you’ll pay your final balloon payment or hand the car back (similar to leasing).
With HP, you’ll make your final monthly payment and possibly an ‘option to purchase’ payment – depending on your agreement.
PCP vs. HP costs
The costs of financing a car with PCP and HP will differ, as you’re following a different payment structure.
To help you understand, we’ll imagine you’re financing an imaginary car that’s going to cost £20,000 on finance. We’ll also pretend you’ve found a 0% interest deal (not likely with HP but possible with PCP – we're just keeping the maths simple).
If you put down a £5,000 deposit on a PCP deal and the GMFV after a two-year term is £10,000, that leaves a total of £5,000 for you to pay in monthly instalments – so £208 per month for two years.
With a HP finance deal, also for £20,000 across three-years with 0% interest and a £5,000 deposit, you’ll have to pay £15,000 across monthly payments - £416 per month for those three years.
The difference is, you’ll still need to pay the GMFV amount at the end of your PCP agreement if you want to own the car. That’s a £10,000 payment to make in our imaginary example.
Keep in mind, this is a made-up example, and we can’t guarantee you’ll find a deal with these figures from any lender – not even with us here at cinch.
Should I choose PCP or HP?
Choosing car finance will be based on your personal circumstances and what suits your needs. If you want tailored advice, it’s a good idea to speak to a lender who can go through your circumstances in detail.
As a summary, you might consider HP car finance if:
You know you definitely want to keep the car
You don’t want to stick to an annual mileage allowance
You want fixed monthly payments and no balloon payment
PCP might be the one to consider if:
You’re unsure if you want to keep your car and want the option to hand it back at the end of the contract
You don’t want to worry about depreciation (if you’re handing the car back)
You like the sound of leasing but are worried you might get too attached to the car and want the option to buy it
Take a look at our used cars that are available for finance deals.
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