Most new and used cars in the UK are bought on finance. The two most popular options are Hire Purchase (HP) and Personal Contract Purchase (PCP). Understanding the difference before you visit a dealership can save you thousands of pounds.
Hire Purchase (HP)
HP is the simplest form of car finance. You pay a deposit, then make fixed monthly payments over the agreed term. At the end, you own the car automatically — there is no balloon payment and no decision to make. HP payments are higher than PCP because you are paying off the full value of the car, but the total cost of credit is usually lower.
Personal Contract Purchase (PCP)
PCP offers lower monthly payments because you are only financing the difference between the car's purchase price and its predicted future value (the "balloon" or Guaranteed Minimum Future Value). At the end of the agreement you choose: pay the balloon to own the car, hand it back, or use any positive equity as a deposit on a new PCP deal.
What to Look For
APR: The Annual Percentage Rate is the true cost of borrowing, including all fees. Compare APR across deals, not just monthly payments.
Total amount payable: The sum of all payments including deposit and any balloon. This is the real cost of the deal.
Mileage limits: PCP agreements include a mileage cap — exceeding it incurs a per-mile penalty charge at the end.
Condition requirements: If you hand back a PCP car, it must be in good condition or you may face additional charges.
Hire Purchase (HP) means you pay a deposit then fixed monthly payments to own the car outright at the end of the term — no balloon payment and no decision to make. Personal Contract Purchase (PCP) has lower monthly payments because you only finance the car's depreciation, not its full value. At the end you choose to pay a balloon payment to own it, hand it back, or use any equity as a deposit on a new PCP deal. HP typically has lower total interest; PCP has lower monthly payments.
Representative APR on new car PCP deals from manufacturers typically ranges from 6% to 10%. Used car HP finance from dealerships is often 12%–20%+. Your actual rate depends on your credit score, the age of the car, the lender and the term length. Always compare the total amount payable — not just the monthly payment — to judge the true cost of a deal.
Yes. A larger deposit reduces the amount you need to borrow, which lowers both the monthly payment and the total interest paid. For PCP deals, a larger deposit also reduces the amount being financed (the difference between the car's price and its Guaranteed Minimum Future Value), so the monthly savings are amplified by the interest reduction. Use the car finance calculator to compare scenarios side by side.
At the end of a PCP term you have three options: (1) Pay the Guaranteed Minimum Future Value (GMFV/balloon payment) to own the car outright. (2) Hand the car back at no extra cost, as long as it is within the agreed mileage and in good condition. (3) Use any positive equity (market value minus GMFV) as a deposit on a new PCP deal. If you plan to hand back the car, watch your mileage carefully — excess mileage charges can be significant.