HP and PCP Explained: How the Two Main Types of Car Finance Work

Hire purchase (HP) spreads the whole price of the car over fixed monthly payments and you own it at the end. Personal contract purchase (PCP) has lower monthly payments because a large final payment is left to the end, when you choose whether to pay it, hand the car back or change to another car.

Both are secured on the car, and with both the finance company owns the car until the agreement is settled. The right one depends on how long you plan to keep the car and how many miles you drive.

How does hire purchase work?

You usually pay a deposit, then a fixed amount each month for an agreed term. The payments cover the price of the car plus interest. Once the last payment and any option-to-purchase fee are paid, the car is yours.

• There is no mileage limit and no end-of-term inspection.

• Monthly payments are normally higher than PCP on the same car, because you are paying off the whole price.

• You cannot sell the car during the agreement without settling the finance first.

MoneyHelper has an independent guide to buying a car with hire purchase.

How does PCP work?

You pay a deposit and monthly payments for the term, but part of the price is deferred into an optional final payment, often called the balloon payment. The lender sets that figure at the start, based on what it expects the car to be worth at the end and the annual mileage you agree to.

At the end of a PCP you have three choices:

1. Pay the optional final payment and keep the car.

2. Hand the car back and pay nothing more, provided it is within the agreed mileage and in fair condition.

3. Part exchange it. If the car is worth more than the final payment, the difference can go towards your next car.

Interest is charged on the deferred amount as well as the part you are repaying, so over the full term PCP can cost more in interest than HP, even though the monthly payment is lower.

MoneyHelper explains the detail in its guide to buying a car with PCP.

Which is better, HP or PCP?

Neither is better for everyone. As a rough guide:

• HP tends to suit drivers who want to own the car, plan to keep it for years, cover high or unpredictable mileage, or do not want to think about condition charges.

• PCP tends to suit drivers who change car every few years, know their annual mileage and would rather keep the monthly payment lower.

Always compare the total amount payable on each quote, not only the monthly figure. Our guide on how to choose the right finance option goes through the questions to ask yourself.

What should I check before I sign?

• The total amount payable and the interest rate.

• The length of the agreement and whether the payment still works if your circumstances change.

• On PCP, the mileage allowance, the excess mileage charge and the optional final payment.

• Any fees, and what happens if you miss a payment.

Common questions

Can I pay off HP or PCP early?

Yes. You have a legal right to ask the lender for a settlement figure at any time and pay the agreement off early. See can you pay car finance off early.

Can I hand the car back before the end?

Under both HP and PCP you can end the agreement and return the car through voluntary termination once you have paid half of the total amount payable, or by making up the difference to half. You may still be charged for damage beyond fair wear and tear.

What if I go over the mileage on a PCP?

If you hand the car back you will be charged for each mile over the allowance, at the rate set out in your agreement. If you pay the final payment and keep the car, the mileage does not matter.

Talk it through in Barnsley

anycolourcar.com is a used car dealer in Barnsley, South Yorkshire. You can browse the cars in stock, read more about car finance with us or call the sales team on 01226 574410. Finance is subject to status and affordability checks. We are a credit broker, not a lender.

This guide is general information, not financial advice. Updated October 2026.