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What Is the Difference Between PCP and HP: Car Loans in the UK

Written by, Marija Petkova

Updated June, 28, 2022

If you are in the market for a new vehicle and want to know what is the difference between PCP and HP financing, we’re here to help!

While it all comes down to whether or not you retain the vehicle ownership outright, there’s more to it, as covered by this helpful guide.

Let’s get to it!

What Is HP Finance?

Before considering either HP or PCP as your go-to financing option for a new car, let’s cover both options briefly.

Hire Purchase (HP) is a common type of car credit that allows you to obtain and use a new vehicle with an initial deposit and regular monthly deposits (including interest) after that.

Then, once you’ve made your final repayment (within three to four years), you receive full ownership of the vehicle. Note that larger deposits and longer contracts result in lower regular payments, but you end up paying more due to accrued interest.

What Is PCP Finance?

Like HP, the Personal Contract Purchase (PCP) option lets you drive a newly-purchased vehicle by paying a single initial payment and monthly deposits to your lender. However, you are not covering the total price but the value amount the car will lose throughout the contract.

Therefore, you are only paying lower monthly rates to cover the difference between the vehicle’s starting price and its Guaranteed Future Value (GFV), as estimated by the lender.

With a PCP, you become the car’s rightful owner only if you pay the final GFV amount. Also, you can return the vehicle or swap it for a different model and a new PCP contract.

HP vs PCP Finance: Pros & Cons

To help you decide between PCP and HP loans, take a look at our comparison table as it outlines the advantages and disadvantages of both options:

ProsNo large payment to close out the contract;
Free from mileage restrictions or wear and tear costs;
You become the outright owner by the term’s end;
More readily available than other types of loans.

Much lower payments as you only have to cover the depreciated worth;
You could obtain a much more expensive vehicle;
You can easily update to the latest model with a new PCP contract;
More flexibility in the end as you can return, swap, or fully purchase the vehicle.
ConsThe deposit and monthly payments are the highest of the car financing options;
Unsuitable if you often change vehicles;
Loan secured against the car, so you may have to return it if you miss payments.
Additional terms to consider, such as mileage restrictions and wear and tear penalties;
Requires a large final payment to become the legal owner;
Mostly available for newer cars over £10,000.

PCP vs HP Finance: Costs Comparison

When deciding on PCP or HP, you should consider the costs, especially your credit score, associated with either option.

For instance, with HP loans, you pay higher monthly instalments that do not fluctuate. Moreover, you are not required to abide by certain mileage restrictions or pay wear and tear penalties as you cover the entire vehicle price over time.

On the other hand, PCP schemes are based on the minimum GFV of a vehicle, which is determined by the lending institution. Additionally, your agreement will include penalties for surpassing a particular yearly mileage or damaging the car.

Note: Some finance lenders may require you to pay a dealer stock fee, or contract, service, and arrangement costs, in addition to the initial investment.

HP vs PCP Costs Example

The following table outlines an example of the typical cost difference between PCP and HP for the same vehicle value:

Types of costsHP planPCP plan
Price of the car£15,000£15,000
Initial deposit£1,000£1,000
Borrowed amount£14,000£14,000
Contract term36 months36 months
Representative APR7,9%7,9%
Monthly rate£436,31£268,85
Final balloon paymentN/A£6,750

Different lenders may offer different rates than those presented above. Therefore, in addition to considering the differences between PCP vs HP plans, you should get a quote from various lending institutions to find the best prices and deals in the UK.

Choosing Between HP and PCP

So now that you know the difference between hire purchase vs personal contract purchase, which one should you use for your car purchase? If you can’t pay higher charges and/or are unsure if you want to keep the vehicle, go with PCP, whereas HP contracts allow you to retain vehicle ownership in the end, albeit with a higher initial deposit and monthly payments.

Frequently Asked Questions And Their Answers

How does HP finance work?

With HP, you pay a larger initial sum and monthly payments in order to own the vehicle outright at the end of the contract term.

How does PCP finance work?

With PCP, you pay smaller monthly amounts but are left with a large “balloon payment” at the end of the contract if you choose to retain car ownership.

Can you change from PCP to HP?

It depends on your lender, but ultimately most of them can reevaluate your contract, submitted payments, and the vehicle’s current condition to extend the current arrangement.

Is PCP better than HP?

It depends on your circumstances and preferences. If you regularly swap out your vehicles and prefer to pay less monthly, then yes, PCP is a good idea. To learn more about what is the difference between PCP and HP, check out the entire article above.

My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.