What is the difference between HP and PCP?

HP (Hire Purchase) finances the full car over monthly payments — you own it at the end. PCP finances only the depreciation, leaving a balloon payment (GMFV) at the end — you can return the car, pay the balloon to own it, or use equity in a new deal. PCP has lower monthly payments but is more complex.

It depends on your priorities. HP is simpler and cheaper if you intend to own the car long-term. PCP offers lower monthly payments and flexibility but can cost more overall if you always pay the balloon. For drivers who regularly change cars every 3–4 years, PCP can be convenient.

What is voluntary termination on PCP?

Under Section 99 of the Consumer Credit Act, you can voluntarily terminate an HP or PCP agreement when you have paid 50% of the total amount payable. If you've paid more than 50%, you can return the car and owe nothing more — as long as the car is in good condition.

What happens at the end of a PCP deal?

At the end of a PCP you have three options: 1) Return the car — walk away, owing nothing (assuming you've kept within mileage limits and the car is undamaged). 2) Pay the GMFV (balloon payment) and own the car outright. 3) Use any equity (market value minus GMFV) as a deposit on a new PCP deal.

What are PCP mileage limits?

PCP agreements set an agreed annual mileage. Exceeding it attracts a per-mile excess charge — typically 6–15p per mile. Set your agreed mileage realistically at the start; you can usually pay to increase it mid-contract for less than the end-of-term excess charge.

Car Finance Explained UK | HP vs PCP vs Personal Loan

Q: What is a good APR for car finance?

New car promotional rates are often 3–7% APR for strong credit. Used car finance typically ranges from 8–15%. APRs above 20% are considered expensive — a personal bank loan or credit union may be cheaper. Always compare the total amount repayable, not just the monthly payment.

Bottom line: HP is simplest and cheapest if you keep the car. PCP has lower monthly payments and flexibility. A personal loan means you own the car outright. Compare total repayable cost, not monthly payment.

Hire Purchase (HP)

HP is the most straightforward form of car finance. The finance company buys the car; you pay it back in monthly instalments over an agreed term (usually 2–5 years). At the end, once you've made the final payment (and a small 'option to purchase' fee), you own the car.

How monthly payments are calculated: The loan amount is the car price minus your deposit. The lender applies an annual percentage rate (APR) using standard amortisation: each month's payment covers interest on the outstanding balance plus a portion of capital. Use our Car Finance Calculator to calculate your exact monthly payment.

Pros: Simple, predictable, no mileage limits, car is yours at the end.
Cons: Higher monthly payments than PCP; the car isn't yours until the final payment — lender can repossess if you miss payments.

Personal Contract Purchase (PCP)

PCP is currently the most popular form of car finance in the UK. Like HP, you pay monthly instalments, but the key difference is that you're only financing the depreciation element of the car — not the full price. A portion of the car's value is deferred to the end as a Guaranteed Minimum Future Value (GMFV), also called the balloon payment.

How the GMFV works: At the start of the agreement, the finance company sets the GMFV — the price they guarantee the car will be worth at the end. Monthly payments cover the difference between the car price and the GMFV, plus interest. Typically the GMFV is set at 40–55% of the list price for a 4-year deal.

At the end of a PCP, you have three options:

Return the car — walk away with nothing owed (within mileage and condition limits)
Pay the balloon — pay the GMFV and own the car outright
Use the equity — if the car's market value exceeds the GMFV, you have positive equity to put towards a new deal

Pros: Lower monthly payments; flexibility at the end; can upgrade regularly.
Cons: Mileage limits and excess charges; more complex; higher total cost if you always pay the balloon.

Mileage excess charges: PCP contracts set agreed annual mileage. Exceeding it typically costs 6–15p/mile at the end. Set your mileage limit at least 10% above what you realistically expect — it's cheaper to overpay upfront than pay excess at the end.

Personal Loan

A personal bank loan (or credit union loan) is often overlooked for car finance. You borrow the full car price, pay fixed monthly instalments, and own the car from day one.

Pros: You own the car outright immediately (can sell whenever you want); no mileage limits; often competitive APRs for good credit profiles; no deposit needed.
Cons: No promotional rates; monthly payments similar to HP; requires a separate credit application.

For used cars where dealer promotional finance rates are not available, a personal loan from a bank or building society can be significantly cheaper than dealership HP or PCP.

HP vs PCP vs Personal Loan

Factor	HP	PCP	Personal Loan
Monthly payments	Medium	Lower	Medium
Total interest (if you own)	Low	Medium-high	Low-medium
Mileage limits	None	Yes	None
Ownership	End of term	Optional (balloon)	Immediate
Flexibility	Low	High	Highest
Best for	Keeping the car	Regular upgraders	Used cars; good credit

Voluntary Termination

Under Section 99 of the Consumer Credit Act 1974, you can voluntarily terminate an HP or PCP agreement once you have paid at least 50% of the total amount payable (including all payments, the option-to-purchase fee, and the GMFV for PCP). Return the car in good condition and you owe nothing further.

This is a legal right the dealer cannot remove. It's a useful backstop if your circumstances change — but check the total amount payable (not just monthly payments) before using it, as the threshold is often higher than people expect.

Getting the Best Deal

Compare APR: The advertised rate is the representative APR — only 51% of applicants need to be offered this rate. Check your actual rate before committing.
Negotiate the car price: Finance is calculated on the purchase price. A lower price saves more than haggling over the APR.
Check your credit score first: Applying for finance with poor credit can result in a worse rate or rejection. Check via Experian, Equifax, or TransUnion before applying.
Bigger deposit: Reduces the loan amount and total interest paid.
Shorter term: Higher monthly payments but significantly less interest overall.

Use the Car Finance Calculator to compare HP and PCP side by side — enter the same price, APR, and term to see the true difference in total cost.

Frequently Asked Questions

Is HP or PCP better? ▼

HP is simpler and cheaper if you intend to keep the car long-term. PCP has lower monthly payments and flexibility at the end — but costs more overall if you always pay the balloon to own the car. If you regularly change cars every 3–4 years without paying the balloon, PCP can work well. If you keep cars for 6+ years, HP wins.

What happens at the end of a PCP? ▼

Three options: (1) Return the car — walk away, no more payments. (2) Pay the GMFV balloon and own it. (3) If the car's market value exceeds the GMFV, use the equity as a deposit on a new deal. Most drivers return or trade in; paying the balloon is usually the most expensive route.

What is a good APR for car finance? ▼

New car promotional rates: 3–7% for strong credit. Used car dealer finance: 8–15%. Personal loans: 5–12% for good credit. Always compare total repayable, not just monthly payment. A slightly higher APR on a shorter term can cost less overall than a lower APR over a longer term.

What is voluntary termination? ▼

Under Section 99 of the Consumer Credit Act 1974, you can return the car once you've paid 50% of the total amount payable. This is a legal right — the dealer can't remove it. Condition charges may apply, but you owe no further monthly payments.

Can I pay off car finance early? ▼

Yes — you have a legal right to settle car finance early. Ask for a settlement figure (must be provided within 12 working days). Some lenders apply an early repayment charge, usually up to 1–2 months' interest. Settling early saves ongoing interest, but check the settlement figure to confirm it's worthwhile.