Car Finance Explained: PCP vs HP 2026

Compare illustrative figures with the car finance calculator, model a personal loan alternative with the personal loan calculator, and read our personal loans UK guide. More guides are on the WhatsUK blog.

The main types of car finance

Most UK buyers choose between hire purchase (HP) and personal contract purchase (PCP). Both spread the cost with a deposit and fixed monthly payments, but they treat ownership and the final payment differently.

Alternatives include a personal loan, where you borrow the purchase price and own the car from day one, and personal contract hire (PCH), a long-term lease where you never own the vehicle. PCH suits drivers who want a new car every few years without a balloon decision, but there is no option to buy at the end.

How hire purchase works

With HP you pay a deposit, then fixed monthly instalments that cover the full amount borrowed plus interest. Interest is charged on the declining balance, so more of each early payment goes towards interest and more of each later payment clears the capital.

When the last scheduled payment is made, you pay a small option-to-purchase fee (often around £10 to £200) and the car is yours. There is no balloon to decide on and no annual mileage cap, which makes HP straightforward if you plan to keep the car for many years.

How PCP works

PCP also starts with a deposit and fixed monthly payments, but those payments only cover the car's expected depreciation during the agreement plus interest, not the full purchase price. The rest is deferred into a final balloon payment, also called the guaranteed minimum future value (GMFV).

Because a large slice of value sits at the end, monthly payments are usually lower than HP on the same car. At the end of the term you choose what to do next: keep the car, return it, or roll into a new deal. The balloon is set at the start based on the make, model, term, and expected mileage.

The three end-of-term PCP choices

When a PCP agreement ends, you have three options:

• Pay the balloon and keep the car: make the optional final payment and you own it outright.
• Hand the car back: return it within the agreed mileage and condition standards and walk away with nothing further to pay on the finance (subject to any excess wear charges).
• Part exchange: if the car is worth more than the balloon, the difference is equity you can put towards a new PCP or HP deal.

If the car is worth less than the balloon, handing it back avoids paying more than the market value, which is one reason PCP appeals to drivers who change cars regularly.

Balloon payments and future value

The balloon, or GMFV, is the lender's estimate of what the car will be worth at the end of the agreement, assuming you stay within the mileage limit and return it in fair condition. It is fixed when you sign, so you know the optional final payment from the start.

Deferring that value keeps monthly payments lower than HP because you are financing a smaller amount each month. The trade-off is that you do not automatically own the car, and the total payable if you buy it (deposit plus all monthly payments plus the balloon) can exceed HP on the same deal.

Mileage and condition

PCP agreements include an annual mileage limit because higher mileage reduces resale value. If you hand the car back above that limit, the lender charges an excess mileage fee per mile. Typical charges vary by provider but can add hundreds of pounds if you underestimate your driving.

You must also return the car in reasonable condition, allowing for fair wear and tear. Damage beyond that, missing equipment, or overdue servicing can lead to repair charges. HP has no mileage cap because you are paying off the full value regardless of how far you drive.

Who owns the car

Until the agreement is complete, the finance company is the legal owner. On HP that means until the final payment and option-to-purchase fee are paid. On PCP it means until you pay the balloon if you want to keep the car.

You cannot sell the car privately without settling the finance first, because you do not hold good title. If your circumstances change, ask the lender for a settlement figure rather than assuming you can transfer the agreement informally.

How to compare the true cost

A lower monthly payment does not always mean a cheaper deal. Compare the total amount payable: deposit, every monthly payment, the HP option fee or PCP balloon, and any fees. Use the same cash price, deposit, term, and representative APR when comparing HP and PCP.

On PCP, also consider excess mileage risk if you plan to hand the car back, and whether you are likely to pay the balloon or switch cars. Our car finance calculator shows illustrative monthly payments and total payable for both modes side by side.