PCP or HP: should I still consider HP?
The option to spread the cost of buying a car holds huge appeal for most motorists. We take a look at the pros and cons of the two most popular finance methods...
More than three-quarters of all privately bought new cars are purchased on personal contract purchase (PCP) deals. It’s by far the most popular way to finance a new car because it offers lower monthly payments than the other most popular finance hire purchase (HP).
However, it’s not necessarily the best way to obtain a new car, especially if you want to keep it for a long time and eventually own it outright.
So, how do you choose whether a PCP or HP agreement is the right way to finance your next new vehicle?
What is a PCP?
Let’s start with the basics. A PCP is a form of hire purchase, but a substantial portion of the amount borrowed is left until the end of the loan.
In a conventional hire purchase deal, the total amount borrowed is split into equal monthly payments, typically over three or four years, and once you’ve paid these you’re the legal owner of the car.
While PCP also involves a series of monthly payments, they are lower than they would be on an HP deal, and then there’s a far larger payment at the end of the agreement. This end payment is sometimes referred to as a balloon payment, or the minimum guaranteed future value (MGFV).
On the face of it, leaving a big lump sum until the end of the agreement seems like putting off the painful moment when you have to find several thousand pounds. But the point is you don’t have to; paying the MGFV is one of three options open to PCP customers at the end of the loan.
If you don’t want to pay, you can just hand the car back and call it quits. Or, if the car is worth more than the MGFV (which is often the case), you can use the difference between the final payment and the car's true market value as a deposit for another new car.
Choose a PCP if…
- Low monthly payments are all-important
- You’re not sure what you will do at the end of the agreement
- There’s a big manufacturer deposit contribution and a lower interest rate than for HP
Advantages of a PCP
The most obvious attraction of a PCP is the size of the monthly payment. "Under a PCP you are financing a car’s depreciation rather than the whole price, so that reduces the monthly cost," says a spokesperson for the FLA.
It’s not just that it’s cheaper, though. “PCP goes with the grain of changes in modern society. A few years ago we owned our mobile phones. Now most people pay a monthly rental. With cars, the mental switch from needing to own something immediately to paying for it in monthly instalments may be a few years behind, but it’s fundamentally the same thing,” he adds.
Flexibility is another key advantage of PCPs, both compared with HP and forms of leasing, such as personal contract hire. “A PCP keeps consumers’ options open. When people buy a car, they don’t necessarily know if they will make the balloon payment to own it outright, trade in the car for a new one, or just hand the keys back with nothing else to pay, but they know they will have those three choices,” he concludes.
What is an HP deal?
As the name suggests, a hire purchase deal is a method of buying a car rather than paying to use it. The big difference between an HP deal and a PCP is that once you make all the HP payments the car is yours to do with as you wish. This gives you the option to sell the car, trade it in for a new one or keep it. When secondhand car prices are strong, this could be an advantage because you may get a higher price when selling.
Get tips for selling your car in our comprehensive guide.
Choose an HP deal if…
- You’re sure you want to keep the car beyond the end of the finance term
- Higher monthly payments don’t put you off
- You’ve compared PCP and HP deals and HP offers a lower total cost
Advantages of an HP deal
The main benefit over a PCP deal is that you don't have to stump up a large balloon payment to buy the car at the end of the deal.
HP can also work out cheaper than a PCP over the lifetime of a loan because with HP you’re paying off the amount borrowed more quickly. With a PCP, if you decide to buy at the end of the agreement, you have to settle the big balloon payment.
HP isn’t saddled with one of the drawbacks of a PCP: mileage limits. A PCP agreement is drawn up on the assumption you will cover a certain number of miles each year and no more, and the final mileage of the car is used to calculate the MGFV.
The farther you drive, the less the car will be worth, so it’s important that the finance company has some sense of how far you drive each year in order to set the MGFV fairly and accurately. However, with HP, the finance company doesn’t give two hoots how far you drive.
If you exceed the mileage limit specified in a PCP agreement there will be penalty charges to pay. If you’re only talking about a few miles you won’t be seriously out of pocket. However, if you change jobs during the finance period and face a much longer commute, then you could be hit hard.
If you do find you are covering a lot more miles than planned, don’t wait to be clobbered with a big bill at the end of the agreement. Instead, talk to the loan provider about your change in circumstances so the terms of the agreement can be revised.
Differences between PCP and HP
Whether a PCP or HP deal will suit you best depends on a number of factors, including how important it is to lower your monthly costs, if you know you want to own the car at the end of the finance agreement and if you’ll be able to stick to mileage limits.
Below we list the main pros and cons of each type of finance to make it easier for you to see which option will suit you best.
| PCP finance | HP finance |
| Cheaper monthly payments | Higher monthly payments |
| May get bigger car maker deposit contribution | More equity towards a new car than PCP |
| May get lower interest rate | May work out cheaper overall to buy car |
| Three options at end of deal | Own car at end of agreement |
| Can hand car back at end of deal | Have to sell car if you want to get rid of it |
| Lump sum required to buy car | No lump sum to buy car |
| Overall and annual mileage limits | No mileage limits |
| Excess mileage fees | No excess mileage fees |
How to compare PCP and HP finance deals
When comparing the PCP and HP deals on a vehicle, ensure that they both run for the same number of months. The most common finance agreement length is 36 months, but many lenders also offer deals for 24 and 48 months.
Whether or not you want to keep the car at the end of the deal, it’s important to check the overall cost of the finance package because car maker incentives can sometimes make a PCP deal a cheaper way to buy a car than an HP deal. On PCP deals you need to ensure you include any deposit contribution offered by the car maker and the MGFV payment that’s required to buy the vehicle. HP deals are simpler, but ensure you include the deposit and any small additional final payments that are required.
How much does a car cost on PCP vs HP?
There are many variables in finance deals, such as the rate of interest and if a car maker is offering a discount or deposit contribution, but in general PCP deals offer cheaper monthly payments than HP. Below we’ve looked at the cost of buying a BMW 1 Series on PCP and HP. The difference between the monthly payments in this instance is very large, but this may not be the case with all PCP and HP deals.
BMW 120 Sport
On-the-road price: £31,065
Annual mileage 10,000 miles
| BMW PCP deal | |
| Deposit | £4500 |
| 36 monthly payments | £380 |
| Optional final payment | £16,364 |
| Interest rate | 4.9% |
| Total payable | £34,152 |
| Excess mileage fee | 9.6p per mile |
| BMW HP deal | |
| Deposit | £4500 |
| 36 monthly payments | £794 |
| Interest rate | 4.9% |
| Total payable | £33,074 |
If you want the lowest monthly payments possible, it may be worth taking out a personal lease for your car. There are drawbacks to this type of finance, which we highlight in our leasing guide.
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FAQs
With a PCP deal you’re only financing the depreciation of the car you’re using, whereas you’re buying it outright on an HP deal, which is why the monthly payments for the latter are usually more expensive. However, if you get a PCP deal with a low interest rate and a big deposit contribution from the car maker, this can make the overall cost of buying a car on a PCP deal lower than it would be on an HP deal, so it’s worth looking at the figures and working out which is the best option for you.
That depends on what your priorities are. If you simply want the lowest possible monthly payments and don’t mind not owing the car, a PCP deal may be best for you. Alternatively, if you intend to buy a car and keep it for many years, HP may be a better bet because you’ll own the car outright as soon as you’ve made the final monthly payment. In contrast, if you want to buy a car on a PCP deal, you’ll have to make a large final payment.
While PCP deals are designed for people who want low payments and a brand new car every two or three years, they can also suit people who want to buy a car outright. That’s because car makers often incentivise these finance packages with low interest rates and hefty deposit contributions that sometimes mean it’s cheaper to buy a car outright via the PCP deal than by getting it on HP or other finance.
It’s also worth noting that a PCP deal gives you the chance to change your mind about whether or not you want to buy a car at the end of the deal, providing more flexibility that may suit people whose circumstances change during the finance term.
Although around 75% of all new cars are now bought on PCP deals, it is still worth considering HP finance, especially if you know you want to keep the car after the finance agreement ends. Buying via an HP deal also means you don’t have to worry about getting penalised for exceeding mileage limits.
