PCP vs HP Car Finance: Which Saves You Money? | Hexham Guide 2026

PCP and HP are the two most common ways to finance a car in the UK. The key difference: PCP has lower monthly payments but a huge balloon payment at the end if you want to keep the car. HP has higher monthly payments but you own it outright when finished—no surprises, no final lump sum.

This guide compares both with real cost examples, showing you which is actually cheaper depending on whether you plan to keep the car, trade it in every few years, or return it. We also cover mileage restrictions, damage charges, voluntary termination rights, and why most dealers push PCP when HP might save you money.

The Quick Answer

Which should you choose?

• Choose HP if: You want to own the car, plan to keep it 5+ years, do high mileage, or hate monthly payment cycles
• Choose PCP if: You want lower monthly payments, change cars every 2-4 years, do low mileage, or prefer always driving newer cars
• Choose neither if: You can pay cash or get a personal loan at lower APR (see our complete finance guide)

The biggest myth: "PCP is always cheaper." False. PCP only saves money if you return the car. If you keep it (paying the balloon), you often pay MORE than HP would have cost due to higher interest rates on PCP deals.

What is Personal Contract Purchase (PCP)?

PCP finance means you pay a deposit, then monthly payments covering the car's predicted depreciation over 24-48 months. At the end, you have three options:

How PCP monthly payments are calculated:

You only pay the depreciation, not the full car value. Example: £30,000 car predicted to be worth £22,000 after 3 years = you pay £8,000 depreciation over 36 months.

The balloon payment trap: That "low" monthly payment doesn't include the £22,000 you'll owe at the end if you want to keep the car. Most people can't afford it, so they roll into another PCP (perpetual payments) or return the car (never building equity).

✅ PCP Advantages:

• Lower monthly payments: Typically 30-40% less than equivalent HP
• Flexibility at end: Return, keep, or trade-in
• No depreciation worry: If car value drops more than predicted, that's the lender's problem
• Access to newer cars: Can afford higher-spec models with lower payments
• Upgrade cycle: Easy to get into new car every 2-4 years

❌ PCP Disadvantages:

• Never own it: Unless you pay balloon, you never build equity
• Mileage limits: Typically 5,000-15,000 miles/year; 10-15p per excess mile
• Damage charges: Worn tires, dents, scratches = fees when returning (BVRLA "fair wear and tear" guide)
• Balloon payment shock: £10,000-£15,000 lump sum due if keeping car
• Higher total cost: If you keep the car, often costs MORE than HP would have
• Perpetual payments: Rolling into new PCP every 3 years = never-ending debt cycle

What is Hire Purchase (HP)?

HP is simpler: you pay a deposit, then fixed monthly payments covering the full car value plus interest over 12-60 months (typically 36-48). At the end, you own the car after paying a small option fee (£100-£200).

How HP payments work:

You're buying the car in instalments. Each payment covers principal (car value) plus interest. Example: £20,000 car with £4,000 deposit = £16,000 borrowed ÷ 48 months = £333/month (before interest).

✅ HP Advantages:

• You own it: Car is yours at end (after £100-£200 option fee)
• No mileage limits: Drive as much as you want
• No damage charges: It's your car—wear and tear is your problem, not theirs
• Build equity: Each payment increases your ownership stake
• Cheaper if keeping: Lower total cost than PCP if you plan to own 5+ years
• Simpler structure: No balloon surprises, no return conditions
• New or used cars: Available on any car (PCP usually new only)

❌ HP Disadvantages:

• Higher monthly payments: 30-40% more than PCP
• Depreciation is yours: If car value plummets, you still owe full amount
• Harder to upgrade: Must sell or trade-in to get new car
• Larger deposits: Often require 10-20% upfront
• Longer terms = more interest: 48-60 month deals accumulate more interest cost

Real Cost Comparison: Same £40,000 Car

Let's compare a £40,000 car with £10,000 deposit over 3 years. Assuming 0% interest on PCP (rare but used for clean comparison) and 5% on HP (typical):

What this means:

• PCP wins on monthly affordability: £278/month less (£555 vs £833)
• HP wins on total cost IF keeping car: £42,388 vs £40,000 (but PCP requires £10k lump sum)
• PCP wins IF returning car: £30k paid for 3 years use vs owning a depreciating asset
• Reality check: Most people can't save £10k balloon payment, so they roll into another PCP (perpetual debt)

With realistic APR rates (PCP 6.9%, HP 7.9%):

Same £40k car, £10k deposit:

• PCP: £632/mo + £10,000 balloon = £32,752 paid to keep it (£32,752 total)
• HP: £928/mo for 36 months = £43,408 total to own it

PCP costs £10,656 LESS if you keep the car (when comparing realistic rates). But you need £10k saved for balloon—most people don't, so they refinance it (more interest) or roll into new PCP.

Key Differences: Side-by-Side Comparison

When Should You Choose PCP?

PCP makes sense if you:

• Change cars every 2-4 years: New car cycle, always under warranty
• Do low mileage: Under 10,000 miles/year comfortably
• Want lower monthly payments: Can't afford £800/mo but can do £550/mo
• Don't want depreciation risk: Return car if value tanks
• Like flexibility: Return, keep, or trade-in at end
• Can afford balloon OR happy to return: Have £10k saved or genuinely plan to hand it back
• Want newer cars: PCP lets you afford higher-spec models for same monthly payment

Who shouldn't use PCP:

• High-mileage drivers (15k+ miles/year = expensive penalties)
• People who want to own their car
• Those who can't save the balloon payment
• Drivers with kids/dogs (damage charges add up)
• Anyone wanting to modify the car (not allowed on PCP)

When Should You Choose HP?

HP makes sense if you:

• Want to own the car: Build equity, no balloon surprises
• Keep cars 5+ years: Lower total cost than PCP if keeping long-term
• Do high mileage: No limits or penalties
• Hate payment cycles: Pay it off and be done (no rolling into new deals)
• Can afford higher monthly: £800/mo budget vs £550/mo
• Don't mind depreciation: Understand you're buying a depreciating asset
• Want used cars: HP works on any car; PCP usually new only

Who shouldn't use HP:

• Those who want latest car every 3 years
• Can't afford £800+ monthly payments
• Want flexibility to return car
• Don't want depreciation risk

Can You End PCP or HP Early?

Yes. Both PCP and HP have voluntary termination (VT) rights under the Consumer Credit Act 1974. Once you've paid 50% of the total amount (including interest and fees), you can return the car and walk away—no further payments, no damage to credit score (assuming car in good condition).

How 50% rule works:

Example: £20,000 PCP with £8,000 balloon = total payable £28,000. You need to pay £14,000 (50%) before VT. Your monthly payments only cover depreciation, so 50% comes around month 30-33 of a 36-month deal.

Early settlement (paying off early):

Both allow early settlement (paying remaining balance early). Lender provides settlement figure. Some charge early repayment fees (£50-£200); check your agreement.

Tip: With HP, settling early often makes sense if car value > remaining balance (positive equity). With PCP, rarely worth it unless you're keeping the car AND have cash for balloon.

Our Recommendation

After helping hundreds of Hexham customers with finance decisions:

• Most people should choose HP if they can afford the monthly payment—you own the car, no surprises, no balloon anxiety.
• PCP works for specific situations: Low mileage, genuine car-switching every 3 years, or can't afford HP monthly payment.
• Avoid PCP if: You plan to keep the car but can't save the balloon—you'll end up refinancing it (more interest) or rolling into another PCP (perpetual debt trap).
• Consider personal loans: If you can get 5-7% APR from a bank, that's often cheaper than dealer finance. See our complete finance guide.

Need help deciding?

We help Hexham customers compare finance options with realistic examples based on their situation. Contact us for honest advice—no sales pressure.