HP, PCP, Leasing Explained | Car Finance Options Guide 2026 Hexham

Title: Car Finance Options Guide 2026 | HP, PCP, Leasing Explained | Hexham

Description: Complete guide to UK car finance from a Hexham dealer. Learn about HP, PCP, leasing, personal loans, 0% deals - with real examples and hidden costs exposed.

Keywords: car finance UK, HP vs PCP, personal contract purchase, hire purchase explained, car leasing guide, 0% finance deals, personal loans cars, bad credit car finance, balloon payment PCP, car finance Hexham

Introduction: Why Car Finance Feels Complicated

Walk into any dealership and ask about finance, and you'll get hit with acronyms: HP, PCP, PCH, APR, GFV, balloon payments. It's deliberately confusing—the more bewildered you are, the easier it is to steer you toward whatever earns the dealer the highest commission.

Here's the reality: 81% of new cars sold in the UK are bought using finance, with 83% of those on PCP deals. Finance isn't some niche option—it's how most people buy cars now. But just because it's popular doesn't mean people understand it.

FCA Investigation Alert: If you bought a car on HP or PCP before January 28, 2021, you could be owed thousands. The Financial Conduct Authority found dealers were secretly inflating interest rates and taking undisclosed commissions—a practice now banned. Billions may be returned to millions of customers.

As a car dealer in Hexham, I've helped hundreds of customers navigate finance options. This guide explains how each type actually works, what they really cost, and which situations suit each one. No jargon, no sales pitch.

Hire Purchase (HP): Straightforward Ownership-Based Finance

Hire Purchase is the most straightforward option. You pay a deposit (typically 10%), make fixed monthly payments over 1-5 years, and at the end the car is yours. There's a small "option to purchase" fee at the end (usually £100-£200), then you own it outright.

During the agreement, the finance company legally owns the car—you're hiring it until that final payment. This means you can't sell it without settling the finance first. But unlike PCP, you're paying off the car's full value, not just depreciation.

Why HP works well:

• Guaranteed ownership: No massive final payment like PCP—just a small admin fee and the car is yours
• No mileage limits: Drive as much as you want without penalty fees
• Simpler structure: Easier to understand than PCP—you're just paying off the car's value plus interest
• Better for bad credit: Approval rates are higher because lenders retain ownership until full payment
• Fixed costs: Monthly payments never change

Keep in mind:

• Higher monthly payments: Typically £50-£150 more per month than PCP because you're paying off the full value
• Delayed ownership: Can't sell the car until final payment is made
• Repossession risk: If you default before paying a third of the total, the lender can repossess without court order

Real example: £15,000 used car on HP

After 48 months, you own the car outright. No further payments, no mileage penalties, no condition assessments. Compare to cash purchase: buying outright saves £2,196 in interest, but spreading the cost makes it manageable.

Personal Contract Purchase (PCP): Lower Payments, Hidden Complexity

PCP dominates UK car finance—83% of financed new cars use this structure. It offers lower monthly payments by deferring a large chunk to the end of the contract.

You pay a deposit (usually 10%), then monthly payments over 2-4 years. But these payments only cover depreciation—not the car's full value. The finance company sets a Guaranteed Future Value (GFV) at the start. Your payments cover the gap between purchase price and GFV, plus interest.

At the end, three choices: return the car and walk away, pay the balloon payment (GFV) to own it, or part-exchange for another PCP deal.

The balloon payment trap: That final payment is often 40-50% of the car's original value. On a £25,000 car, expect £10,000-£12,500. Most people don't have that lying around, so they either return the car (losing all equity) or roll into another PCP—a perpetual payment cycle with no ownership.

Mileage limits and excess charges

PCP contracts have annual mileage limits (typically 5,000-15,000 miles/year). Exceed this and you'll pay 10-15p per mile when returning or part-exchanging.

Example: 10,000-mile annual limit on a 3-year contract = 30,000 total. Drive 39,000 miles and you owe £1,080 at 12p/mile. Underestimate by just 3,000 miles per year and you'll face £1,440 penalty.

The catch: no excess charges if you pay the balloon and keep the car. But if you're keeping it, why use PCP instead of HP?

Real example: £25,000 new car on PCP

Returning the car means £16,180 paid for four years of use with nothing to show. Keeping it costs £27,180 total—more than HP would have cost for outright ownership.

Fair wear and tear charges

When returning a PCP car, the finance company assesses condition using BVRLA guidelines. Damage beyond "fair wear" results in charges.

What counts as excessive? Deep scratches, dents larger than a credit card, interior stains, scuffed alloys, windscreen chips, worn tyres below 3mm tread. Each item: £50-£200. Inspect 2-3 months before contract ends and fix damage yourself to avoid inflated charges.

When PCP makes sense

PCP works if you: definitely want to change cars every 2-4 years, need lower monthly payments, can accurately predict mileage, take excellent care of cars, or are a business user reclaiming VAT.

Leasing (Contract Hire): Long-Term Rental, Zero Ownership

Leasing—officially Personal Contract Hire (PCH)—is fundamentally different. You never have the option to own the car. It's a long-term rental (typically 2-4 years), and at the end you simply hand it back.

You pay an initial payment (usually 3-9 months' worth), then fixed monthly payments throughout the term. Most leasing deals include road tax in the monthly cost.

Why people lease:

• Always drive new: Change vehicles every 2-4 years, constantly getting latest models
• Minimal hassle: Road tax included, no MOT worries (cars under 3 years), no resale concerns
• Fixed costs: Payments never change
• Lower than HP: Often £30-£80 less per month since you're not building equity
• Warranty cover: New cars come with 3-7 year warranties

Serious drawbacks:

• Never own anything: Years of payments, zero asset, zero equity
• Mileage limits enforced: Excess charges 10-20p per mile
• Damage charges: Beyond fair wear and tear results in fees
• Expensive early exit: Thousands to terminate early
• You pay maintenance: Servicing, tyres, upkeep (unless paying for maintenance package)
• No modifications: Can't add tow bars, wheels, anything

Real example: Leasing a £30,000 car

After £12,600 in payments, you hand back the keys and own nothing. For that same money, you could've bought a £10,000 used car outright, run it three years, and still have £2,600 for insurance and servicing—plus own a car worth £6,000-£7,000.

Long-term reality: Lease a car every 3 years for 20 years at £300/month = £72,000 spent with zero assets. Buy quality used cars with cash and you'd own vehicles worth £30,000+ over the same period.

Personal Loans: Own the Car from Day One

A personal loan from a bank or building society gives you cash to buy a car outright. You own it from day one—no finance company, no mileage limits, no condition assessments. You repay the loan in fixed monthly instalments over 1-7 years.

Most personal loans are unsecured (not secured against the car), reducing your risk. If you can't repay, lenders can't automatically repossess your car. However, unsecured loans typically carry higher interest than secured car finance.

Advantages:

• Immediate ownership: Car is yours from purchase—can sell anytime to clear the loan
• No mileage restrictions: Drive unlimited miles
• Simpler: Borrow £X, repay £X + interest—no balloon payments
• Better prices: Dealers often give cash buyer discounts
• Lower APR with good credit: Rates as low as 3-7% for excellent scores
• Shop anywhere: Private sellers, auctions, any dealer

Real example: £12,000 car on personal loan

You own the car from day one. After 48 months, if it's worth £7,000 and you sell, your net cost was £6,728 for four years of motoring. Compare to leasing where you'd own nothing.

When personal loans beat dealer finance: If you can get 6-8% APR and the dealer's HP/PCP is 9-12%, the personal loan saves money. Always compare APR and total amount payable—not just monthly payments.

Zero Percent Finance Deals: Are They Actually Free Money?

Manufacturers occasionally offer 0% APR finance as promotions. You pay no interest—just the car's price spread over the term. Sounds perfect, but there are catches.

These deals usually require larger deposits (20-40%), shorter terms (24-36 months), and excellent credit scores (750+). They're rarely available on the cars you actually want—more often on slow-selling models.

The hidden trade-offs:

• Reduced cash discounts: 0% finance often means no price negotiation. Pay cash and you might get £2,000-£3,000 off
• Vs deposit contributions: Sometimes 6.9% APR + £3,000 contribution beats 0% with no contribution
• Large deposits required: Need £8,000-£12,000 upfront on a £30,000 car
• Higher monthly payments: Shorter terms mean £50-£100 more per month than standard PCP
• Limited availability: Specific trims or colors dealers want to clear

Real comparison: 0% vs standard finance

Despite 0% interest, you've spent £2,836 more. The £2,500 deposit contribution saves more than the interest costs. Always calculate total amount payable across all options.

Part Exchange: Using Your Current Car

If you already own a car, part-exchanging knocks its value off your next car's price, lowering monthly payments or upfront cost.

Why it makes sense:

Faster and easier than selling privately. Can combine with finance offers. No dealing with tyre-kickers or scam artists.

Pro tip: Always bring your service history, V5C logbook, and spare keys—this maximizes part-exchange value.

Understanding the Full Cost

Don't just focus on monthly payments. The true cost includes: interest (APR), admin fees, balloon payments (PCP), early repayment charges, late payment fees, excess mileage (PCP/leasing), and damage charges (PCP/leasing).

APR: The critical number

APR (Annual Percentage Rate) is the yearly cost of borrowing, including interest and fees. It's the single most important figure for comparing deals.

The difference between 5% and 15% APR is £3,072 in extra interest—more than the deposit.

Deposits and Credit Scores

The bigger the deposit, the lower your monthly repayments. Most finance providers require around 10% of the car's value, but more will always help reduce cost and improve approval chances.

Credit score matters

Good credit gives you access to: lower APR deals, 0% finance promotions, and more flexible terms.

If your score isn't great, don't panic—many lenders still offer options. Just expect higher rates (15-25% APR) or longer terms.

Bad credit options:

• Larger deposit: 20-30% deposit improves approval odds and reduces APR
• Cheaper cars: Apply for £7,000-£10,000 vehicles instead of £15,000+
• HP over PCP: Hire Purchase is easier to get approved for with poor credit
• Guarantor loans: Someone with good credit guarantees your loan

Beware the Small Print

Some finance agreements include fees for: going over agreed mileage (PCP/lease), early termination or overpayments, and late payments or missed deadlines.

Also check if the agreement has flexible terms—such as payment holidays or early settlement options—in case your circumstances change.

Voluntary termination rights: Under the Consumer Credit Act, you can end HP or PCP agreements early once you've paid 50% of the total amount. You return the car and owe nothing more (assuming good condition and within mileage limits for PCP). This does NOT affect your credit score.

Final Thoughts

There's no one-size-fits-all answer—it depends on your lifestyle, budget, and plans. Whether you want to own your car, drive the newest model, or keep monthly payments low, there's a solution.

As dealers, we're always happy to talk through the options, explain the jargon, and help you find a deal that works. Whether it's HP, PCP, a lease, or a personal loan—knowing what you're signing up for is key to avoiding surprises.

Need help choosing the right finance?

Drop in to We Buy Cars Hexham or contact us today — we're always here to help you find the right route to your next car.

Quick Comparison: All Finance Options