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Walk into any car dealership in the UK, and the salesperson will almost certainly push you toward PCP (Personal Contract Purchase). It is the most popular way to finance new cars in the UK.
Why? Because PCP offers the lowest monthly payment. But the lowest monthly payment is rarely the cheapest way to buy something. When you compare PCP against HP (Hire Purchase), the total cost of ownership tells a completely different story.
How Do They Actually Work?
Hire Purchase (HP) - The Traditional Way
You put down a deposit, and you pay off the entire value of the car over a set period (usually 3 to 5 years). Because you are paying off the full amount, your monthly payments are higher. However, at the end of the term, the car is 100% yours. You can keep it, sell it, or drive it into the ground.
Personal Contract Purchase (PCP) - The Modern Way
You put down a deposit, and most of your monthly payments go toward the car’s depreciation rather than its full value. The finance company calculates what the car will be worth at the end of the term (the Guaranteed Minimum Future Value, or GMFV). Interest is still charged on the full financed balance, including the deferred balloon. At the end of 3 or 4 years, you have three choices:
- Hand it back: Walk away with nothing.
- Trade it in: Use any equity (if the car is worth more than the GMFV) as a deposit on a new PCP deal.
- Buy it: Pay the massive final "Balloon Payment" (the GMFV) in cash to own the car.
The Math: £20,000 Car Over 4 Years
Let’s look at a hypothetical illustration for a £20,000 used car. We will assume a £2,000 deposit, an APR of 8.9%, and a 48-month term. For the PCP, the GMFV (Balloon Payment) is set at £9,000.
| Metric | Hire Purchase (HP) | PCP |
|---|---|---|
| Deposit | £2,000 | £2,000 |
| Amount Financed | £18,000 | £18,000 (£9,000 deferred as balloon) |
| Monthly Payment | £445 / month | £290 / month |
| Balloon Payment | £0 | £9,000 |
| Total Amount Payable (If keeping car) | £23,360 | ~£24,935 |
When Does PCP Actually Make Sense?
PCP is not inherently evil; it is just a product designed for a specific type of driver. PCP is better for you if:
- You want to drive a brand-new or premium car that you could never afford on an HP monthly payment.
- You want to change your car every 3 years without the hassle of selling it privately.
- You have cash-flow issues right now and absolutely need a low monthly outgoing.
However, beware of the mileage limits. PCP deals come with strict annual mileage caps (e.g., 8,000 miles/year). If you go over, you will pay excess mileage charges (often 10p to 15p per mile) when you hand it back.
When Does HP Make Sense?
Hire Purchase is mathematically superior if:
- Your goal is ultimate ownership.
- You drive high mileages and don't want to worry about penalties or damage charges.
- You want to pay less total interest over the life of the loan.
About the Author
This guide was prepared by the LoanPoint Editorial Team for educational purposes.