What's the difference between HP and PCP car finance?

What's the difference between HP and PCP car finance?

If you're looking to buy a new or used car on finance, you've probably seen the terms 'HP' and 'PCP' popping up. They're the two main finance options you'll be given if you aren't buying a vehicle outright with cash or a personal loan.

Many people don't know or understand the difference between PCP and HP agreements - so we're here to help. In this guide, we'll explore what these terms mean and compare both options to ensure you make the right decision for you and your money.

What is Hire Purchase (HP)?

Hire Purchase is a type of car finance where you take out a loan secured against the vehicle you're buying. In most cases, you'll put down a deposit (like you would with a mortgage) and borrow the rest of the money from your car finance provider.

Once you've bought your car, you'll need to make fixed monthly or weekly repayments over an agreed period. You'll pay back the funds borrowed plus interest. After your final repayment, you'll legally own the car and won't need to make any more repayments.

Find out more in our 'What is HP car finance?' guide.

What is Personal Contract Purchase (PCP)?

Personal Contract Purchase gives you another option if you want to spread the cost of a new car without a long-term commitment. You may need to put down a deposit and then you'll make fixed monthly payments over an agreed term.

At the end of your PCP term, you'll have the option to make something called a 'balloon payment'. This is a lump sum fee to buy the car outright and take legal ownership. If you don't want to, you can give it back to the dealer and get a different car on a new agreement.

HP vs PCP: head to head

We've looked at each individually but now it's time to compare the key differences between HP and PCP. These are the factors we think should be a key part of your decision.

Ownership 🚗

You don't own the car straight away with either HP or PCP car finance but HP is a straight line to vehicle ownership. Once you've made your final payment, the car is legally yours. You'll have the option to make the balloon payment at the end of your PCP deal if you want to buy the car outright. 

Payments

HP and PCP payments are generally fixed throughout the agreement but HP payments tend to be higher than PCP payments (for the same vehicle). You'll enjoy less coming out of your bank account each month but you'll have to make a sizeable balloon payment if you want to keep the car at the end of the term. Your current budget is probably key to your preference here.

Flexibility 📄

With HP, you're locked into buying your car from the start. You'll own it after the final payment and it's up to you if you want to keep, sell, or exchange it after that. PCP offers greater freedom when you come to the end of your term, as you can buy the car (by making the balloon payment) or send it back to the dealer. Some providers may allow you to use some of the remaining value to start a new PCP contract with them.

Mileage limits 

PCP agreements are subject to mileage limits because this is what they base the value of the car on at the end of the term. If you go over these limits, you may need to pay excess mileage fees. HP deals usually have no mileage restrictions. 

Depreciation 📉

Buying with HP means you pay the value of the car at the time of purchase. By the end of the term, you'll have paid off the car, but its value might have dropped (depreciated). With PCP agreements, you're actually paying off the depreciation of the car rather than its full value, so you technically don't have to suffer this loss. 

Interest 

The interest lenders charge depends more on other factors than just the question of PCP vs HP. The APR you're offered will largely depend on your credit history, deposit, make and model, and chosen provider.

HP vs PCP: which is best for me?

What matters to someone else might not matter to you, and vice versa. The comparison above outlines the key differences between PCP and HP car finance - but only you know what's best for you. To keep it simple, we've picked out some of the key benefits of each.

Go for Hire Purchase (HP) if your priorities are:

• Guaranteed ownership after the finance agreement has ended
• Spreading the total cost of buying a car
• Driving your car without restrictions

Go for Personal Contract Purchase (PCP) if your priorities are:

• Lower monthly payments (compared to cars of a similar value)
• Having more flexibility once the term has ended
• Avoiding depreciation compared to buying with HP

"When it comes to choosing between HP and PCP, it's important to consider the long-term benefits. HP offers a clear, structured path to ownership with fixed monthly payments and the guarantee that, at the end of the term, you'll own the car outright. It's perfect for those who value certainty and prefer to keep their car for the long haul. While PCP provides lower monthly payments and more flexibility, you won't get the same sense of ownership until a final decision is made. HP is the ideal choice if you're looking for simplicity and long-term value." 

- Craig, Head of Underwriting

Get a quote for car finance today 

Hopefully, you've found what you were looking for in our guide to the difference between HP and PCP. At First Response Finance, we offer simple Hire Purchase car finance loans from £2,000 to £15,000 to help you get the keys to your next car. Borrow for anywhere from 18 to 61 months, depending on what's right for you. 

We're incredibly proud to be recommended by 98% of our customers and we've also been voted Best Car Finance Provider four years in a row at the Consumer Credit Awards.

Start your car finance journey today. Get a quote.