// Source citations for the factual claims in this guide (kept out of the // rendered tree: flow-level MDX comments break Next scroll-on-navigation). export const sources = [ "Worked example computed with the formulas in site/lib/car-finance.ts (monthlyPaymentToBalloon): £25,000 car, £3,000 deposit, 48 months, 7.9% APR, £10,000 GMFV → HP £536.05/mo, £3,730.51 interest, £28,730.51 total; PCP £358.23/mo, £5,194.82 term interest, £30,194.82 total if the balloon is paid.", "Statutory sources, verified 2026-06-12 in site/lib/car-finance.ts: voluntary termination is Consumer Credit Act 1974 ss.99-100, https://www.legislation.gov.uk/ukpga/1974/39/section/99 and https://www.legislation.gov.uk/ukpga/1974/39/section/100; representative APR is Consumer Credit (Advertisements) Regulations 2010 (SI 2010/1970) reg 1(3), https://www.legislation.gov.uk/uksi/2010/1970/regulation/1/made (51% rule).", ];

Guide · 5 minute read

PCP or HP: which is better for car finance?

HP is usually better if you intend to keep the car: you pay more each month but finish owning it outright. PCP is better if you want lower payments and the option to walk away, though at the same APR it costs more in interest.

The structural difference

Both are secured car finance: the lender owns the car until you make the final payment. The difference is what the monthly payments are paying off.

With hire purchase (HP), your payments clear the whole amount borrowed. At the end of the term, after a usually small option-to-purchase fee, the car is yours.

With personal contract purchase (PCP), your payments only cover the gap between the car's price and its Guaranteed Minimum Future Value (the GMFV, often called the balloon). That deferred chunk, typically a third to a half of the price, is what makes the monthly payment so much lower. It has not gone away; it is waiting for you at the end.

Compare them at the same APR, not the same monthly

The fair comparison holds the car, deposit, term and APR constant and compares the structures. Our car finance calculator does exactly this, running PCP, HP and a personal loan side by side on the same deal.

Take a £25,000 car with a £3,000 deposit over 48 months at 7.9% APR, with a £10,000 GMFV on the PCP. HP costs about £536 a month; PCP costs about £358, which is £178 a month cheaper. But interest is charged on the whole outstanding balance every month, and on PCP a £10,000 slice of that balance never shrinks. So the PCP accrues roughly £5,195 of interest over the term against £3,731 on HP. If you then pay the balloon to keep the car, the PCP route totals about £30,195 versus £28,731 on HP: same car, same rate, about £1,464 more.

One advertising caveat: the representative APR on the poster only has to be available to at least 51% of customers who take the deal. The rate you are actually offered can be higher, so always compare quotes using your rate, not the headline.

The PCP decision tree at the end

When a PCP term ends you have three options, and which one you genuinely expect to take should drive the PCP versus HP choice up front.

• Hand the car back. You owe nothing more (subject to mileage and condition, below). This is the right outcome if the car is worth less than or near the GMFV. You walk away having effectively rented the depreciation, which is fine if that was the plan.
• Pay the balloon and keep it. You need the GMFV in cash, or a loan to refinance it. If you always intended to keep the car, HP would usually have been cheaper, as the example above shows.
• Trade in and start again. If the car is worth more than the GMFV, the surplus (the equity) becomes the deposit on the next car. This is how dealers keep people on a rolling PCP cycle: a permanent monthly payment and never an owned car. It is not automatically bad, but recognise it for what it is.

If the car is worth more than the balloon, paying or refinancing the balloon and then selling privately can beat handing it back. If it is worth less, hand it back and let the guarantee do its job.

Mileage and condition charges

The GMFV is only guaranteed on the finance company's terms. PCP agreements set an annual mileage cap, and exceeding it triggers a pence-per-mile charge set out in your contract; damage beyond fair wear and tear is also chargeable at hand-back. These charges only bite if you return the car, but they are the hidden cost of underestimating your mileage to get a lower quote. HP has no mileage or condition charges, because the car ends up yours regardless.

Voluntary termination: the exit both contracts share

Under sections 99 and 100 of the Consumer Credit Act 1974, you can terminate a regulated HP or PCP agreement at any time before the final payment falls due. You return the car and your liability is capped at half of the total amount payable: if you have already paid half or more, you owe nothing further beyond any arrears and any damage beyond reasonable wear. On PCP the balloon is part of the total price, so the halfway point arrives late in the term; on HP it arrives roughly midway. It is a genuine statutory right, not a favour from the lender, and it matters if your circumstances change.

So which should you pick?

Choose HP if you plan to keep the car, drive high or unpredictable mileage, or want the loan finished and done. Choose PCP if the lower monthly payment is what makes the car affordable, you like changing cars every few years, and you accept that flexibility costs more in interest. Run your own numbers in the car finance calculator before signing either.

Common questions

Why is PCP cheaper per month than HP?

Because PCP payments only cover the car's expected depreciation down to the GMFV (balloon), not the whole amount borrowed. The balloon is deferred to the end of the term, which lowers the monthly cost but means interest accrues on a balance that never fully shrinks.

What happens at the end of a PCP agreement?

You choose one of three options: hand the car back and walk away (subject to mileage and condition charges), pay the GMFV balloon to own it, or trade it in and put any equity above the GMFV towards the next car's deposit.

Can I end a PCP or HP deal early and hand the car back?

Yes. Sections 99 and 100 of the Consumer Credit Act 1974 give you a voluntary termination right on regulated HP and PCP agreements: return the car and your liability is capped at half the total amount payable, plus any arrears and damage beyond reasonable wear.

Is HP cheaper than PCP overall?

At the same APR and term, yes, if you end up owning the car. PCP charges interest on the deferred balloon for the whole term, so buying the same car via PCP plus the balloon payment costs more in total than HP. PCP can come out ahead only if you hand the car back and the flexibility was worth it.

What is a GMFV or balloon payment on car finance?

The Guaranteed Minimum Future Value is the lender's prediction of the car's worth at the end of a PCP term. It is the lump sum you must pay to own the car, and the guarantee that you can hand the car back instead, even if the market value has fallen below it.

Guidance and education, not regulated financial advice.