PCP vs HP vs Personal Loan: Which Car Finance is Best?

Choosing the right car finance can save you thousands of pounds. This detailed comparison of PCP, Hire Purchase, and personal loans helps you understand which option suits your circumstances and budget.

Quick Comparison Overview

The Three Options Summarised

Personal Contract Purchase (PCP):

• Lowest monthly payments
• Large balloon payment at end
• Option to return, keep, or trade
• Mileage restrictions apply
• Most popular choice

Hire Purchase (HP):

• Higher monthly payments
• No balloon payment
• Own car at end
• No mileage restrictions
• Straightforward ownership path

Personal Loan:

• Highest monthly payments (usually)
• Own car immediately
• No restrictions
• Strongest negotiating position
• Often lowest total cost

Personal Contract Purchase (PCP) Detailed

How PCP Really Works

The structure:

1. Choose car - New or used
2. Pay deposit - Typically 10-20%
3. Set annual mileage - Usually 6,000-15,000 miles
4. Agree contract term - Usually 24-48 months
5. Make monthly payments - Lower than HP
6. Final choice - Return, buy, or trade

The balloon payment (GMFV):

• Guaranteed Minimum Future Value
• Large final payment (typically 40-50% of car value)
• Deferred to end of contract
• This is why monthly payments are lower

Real-World PCP Example

£25,000 Ford Focus, 3 years, 10,000 miles/year:

• Car value: £25,000
• Deposit (10%): £2,500
• Balloon payment: £10,000
• Amount financed: £12,500
• APR: 7.9%
• Monthly payment: £329
• Contract length: 36 months

Three options at end:

Option 1: Return the car

• Hand keys back
• Walk away
• Total paid: £2,500 + (£329 × 36) = £14,344
• Nothing more to pay if within mileage and good condition

Option 2: Pay balloon and keep

• Pay £10,000
• Own car outright
• Total paid: £24,344
• Interest paid: £1,844

Option 3: Trade for new PCP

• Use any equity as deposit
• Start new PCP deal
• Common choice
• Perpetual payments

PCP Advantages

Lower monthly payments:

• 30-50% less than HP
• More affordable monthly budget
• Can afford better car
• Easier to pass affordability checks

Flexibility at end:

• Not locked into owning
• Can return if circumstances change
• No depreciation risk if returning
• Trade-in option available

Protected against depreciation:

• GMFV guaranteed by finance company
• If car worth less, their problem
• If worth more, you benefit
• Peace of mind on value

Good for regular upgraders:

• Change car every 2-4 years
• Always drive modern car
• Latest technology
• Under warranty period

PCP Disadvantages

Never own car (unless pay balloon):

• Years of payments
• Still don't own car
• Perpetual payment cycle
• Building no equity

Mileage restrictions:

• Annual limit strictly enforced
• Excess mileage charges: 10-25p per mile
• Need accurate estimation
• Can be very expensive if exceeded

Example excess mileage cost:

• Contracted: 10,000 miles/year (30,000 total)
• Actual: 15,000 miles/year (45,000 total)
• Excess: 15,000 miles
• Charge: 15,000 × 15p = £2,250 penalty

Condition requirements:

• Must return in good condition
• Charges for excessive wear
• Dents, scratches, interior damage
• Professional valet recommended

Expensive to terminate early:

• Must pay 50% of total amount
• Includes balloon payment
• Significant cost
• Negative equity common

Interest on balloon payment:

• Charged interest even though deferred
• Increases total cost
• More expensive than it appears

Who Should Choose PCP?

PCP is best if you:

• Want lowest monthly payments
• Change cars every 2-4 years
• Stay within mileage limits
• Keep cars in good condition
• Like having latest models
• Want payment flexibility
• Don't need to own car

PCP NOT suitable if you:

• Want to own car
• High annual mileage (15,000+)
• Keep cars long-term (5+ years)
• Hard on cars (condition)
• Want to modify car
• Dislike restrictions

Hire Purchase (HP) Detailed

How HP Really Works

The structure:

1. Choose car - New or used
2. Pay deposit - Usually 10-30%
3. Agree term - 12-60 months typical
4. Make monthly payments - Fixed amount
5. Own car - After final payment + option fee

Simple structure:

• Borrow car value minus deposit
• Repay with interest
• Own car at end
• No balloon payment
• No mileage limits

Real-World HP Example

£25,000 Ford Focus, 4 years:

• Car value: £25,000
• Deposit (10%): £2,500
• Amount financed: £22,500
• APR: 7.9%
• Monthly payment: £548
• Contract length: 48 months
• Option fee: £150

Total cost:

• Deposit: £2,500
• Monthly: £548 × 48 = £26,304
• Option fee: £150
• Total: £28,954
• Interest paid: £4,454
• You own the car

HP Advantages

You own the car:

• Becomes yours at end
• Asset you possess
• Can sell anytime (after paying off)
• Building equity

No mileage restrictions:

• Drive unlimited miles
• No excess charges
• Perfect for high mileage
• Freedom to use as needed

No condition requirements:

• No return inspection
• Wear and tear acceptable
• Your car, your responsibility
• No penalty charges

Simpler to understand:

• Straightforward repayment
• Like any loan
• No complicated options
• Clear ownership timeline

Can modify:

• Your car (once owned)
• Add accessories
• Tune performance
• Personal customisation

Cheaper long-term than PCP:

• If keeping car
• No balloon payment interest
• Lower total cost
• Better value for ownership

HP Disadvantages

Higher monthly payments:

• 30-50% more than PCP
• May need cheaper car
• Harder to afford
• Stricter affordability checks

Bear depreciation risk:

• Car value drops
• You own depreciation
• Negative equity possible
• Your loss

Less flexibility:

• Committed to ownership
• Can't just return
• Must complete payments
• Or pay settlement figure

Early settlement costs:

• Still expensive to end early
• Settlement figure can be high
• Less flexibility than PCP
• Tied into contract

Who Should Choose HP?

HP is best if you:

• Want to own the car
• High annual mileage
• Keep cars long-term (5+ years)
• Can afford higher monthly payment
• Want straightforward finance
• Dislike mileage restrictions
• Plan to modify car

HP NOT suitable if you:

• Want lowest monthly payment
• Change cars frequently
• Prefer flexibility at end
• Want to avoid depreciation risk

Personal Loan Detailed

How Personal Loans Work

The structure:

1. Apply for loan - Bank, building society, online lender
2. Receive funds - Money in your account
3. Buy car outright - Pay seller directly
4. Make monthly repayments - To loan provider
5. Own car immediately - From day one

Key difference:

• Car and loan separate
• Car not security for loan
• Own car immediately
• No finance on vehicle
• Unsecured lending

Real-World Personal Loan Example

£25,000 Ford Focus, 4 years:

• Loan amount: £25,000
• APR: 5.9% (good credit)
• Monthly payment: £586
• Term: 48 months

Total cost:

• Monthly: £586 × 48 = £28,128
• Total: £28,128
• Interest paid: £3,128
• You own car from day one

Personal Loan Advantages

Immediate ownership:

• You own car from start
• V5C in your name
• No finance company involvement
• Full ownership rights

Strongest negotiating position:

• You're cash buyer
• Better discounts available
• No dealer finance commission
• Sellers prefer cash buyers

Can buy from anyone:

• Private sellers
• Auctions
• Online platforms
• Any source
• Not limited to dealers

Often lowest interest rates:

• 3-8% typical (good credit)
• Lower than PCP/HP
• Rewards good credit
• Best total cost

Complete flexibility:

• Sell car anytime
• No mileage limits
• No condition requirements
• No restrictions
• No early settlement penalties (usually)

No security on car:

• Car can't be repossessed for loan default
• Unsecured debt
• More protection
• Finance company can't take car

Personal Loan Disadvantages

Higher monthly payments:

• Borrowing full amount
• No balloon payment
• No deposit contribution from dealer
• Typically highest monthly cost

Bear full depreciation:

• Car value loss entirely yours
• No protection
• Negative equity risk
• Your financial risk

Need good credit score:

• Harder to get approved
• Bad credit = high rates
• May not qualify
• Income verification strict

Shorter terms available:

• Usually 1-5 years
• Longer terms rare
• Higher monthly impact
• Less flexibility

Best rates not guaranteed:

• Advertised rate for best credit only
• May get higher APR
• Rate uncertainty until approved
• Representative APR misleading

Who Should Choose Personal Loan?

Personal loan best if you:

• Have good credit score (700+)
• Want best total value
• Buying from private seller
• Want immediate ownership
• No mileage/condition restrictions
• Maximum negotiating power
• Keep cars long-term

Personal loan NOT suitable if you:

• Poor credit score
• Want lowest monthly payment
• Can't afford higher monthly cost
• Prefer dealer finance convenience

Direct Comparison: Same Car

£25,000 Car, 4 Years, Keep Car

PCP (then pay balloon):

• Deposit: £2,500
• Monthly × 36: £329 × 36 = £11,844
• Balloon payment: £10,000
• Total: £24,344
• Interest: £1,844
• Own after: 3 years
• Mileage limit: 30,000 miles

Hire Purchase:

• Deposit: £2,500
• Monthly × 48: £548 × 48 = £26,304
• Option fee: £150
• Total: £28,954
• Interest: £4,454
• Own after: 4 years
• No mileage limit

Personal Loan:

• Deposit: £0
• Monthly × 48: £586 × 48 = £28,128
• Total: £28,128
• Interest: £3,128
• Own from: Day 1
• No restrictions

If You Return PCP Car

PCP (return car after 3 years):

• Deposit: £2,500
• Monthly × 36: £329 × 36 = £11,844
• Total: £14,344
• Car returned
• Nothing owned
• Lowest 3-year cost

Monthly Payment Comparison

For £25,000 car:

Finance Type	Deposit	Monthly	Term	Total Cost	Ownership
PCP	£2,500	£329	36m	£24,344*	After balloon
HP	£2,500	£548	48m	£28,954	After 4 years
Loan	£0	£586	48m	£28,128	Immediate

*If paying balloon to keep car

PCP lowest monthly, but:

• Only for 3 years
• Then £10,000 balloon due
• Or return car and own nothing

HP middle monthly:

• Consistent for 4 years
• Then own car
• Most expensive total

Loan highest monthly:

• Consistent for 4 years
• Own from start
• Middle total cost
• Best terms of ownership

APR Comparison

Typical APR Ranges

PCP:

• New cars: 0-6.9% (manufacturer subsidised)
• Used cars: 7.9-12.9%
• Promotional deals: 0% possible

HP:

• New cars: 5.9-9.9%
• Used cars: 8.9-14.9%
• Less promotional offers

Personal Loans:

• Good credit (750+): 3.0-5.9%
• Average credit (700-749): 6.0-8.9%
• Fair credit (650-699): 9.0-12.9%
• Poor credit (under 650): 13%+ or declined

Why personal loans often cheaper:

• Competitive market
• Unsecured lending
• Credit-based pricing
• No dealer involvement

Total Cost to Own for 10 Years

Scenario: Want to drive for 10 years

Option A: PCP Every 3 Years

3× PCP cycles:

• PCP 1 (years 0-3): £14,344
• PCP 2 (years 3-6): £14,344
• PCP 3 (years 6-9): £14,344
• Buy year 9 car: £10,000 (pay balloon)
• Total: £52,032
• Own car after 10 years

Option B: HP Then Keep

1× HP, keep 10 years:

• HP payment (years 0-4): £28,954
• Own and keep (years 5-10): £0
• Total: £28,954
• Own car after 10 years

Option C: Personal Loan Then Keep

1× Loan, keep 10 years:

• Loan payment (years 0-4): £28,128
• Own and keep (years 5-10): £0
• Total: £28,128
• Own car after 10 years

Saving with loan vs perpetual PCP: £23,904

Hidden Costs and Fees

PCP Hidden Costs

Potential extras:

• Excess mileage: 10-25p/mile (£1,000-£3,000)
• Damage charges: £50-£2,000+
• Early termination: 50% of total
• Missed payment fees: £30-£50
• Late fees: £25-£50

HP Hidden Costs

Potential extras:

• Option fee: £100-£200
• Missed payment fees: £30-£50
• Early settlement fee: Sometimes £25-£100
• Late fees: £25-£50

Personal Loan Hidden Costs

Usually none:

• No mileage charges
• No condition fees
• No option fees
• Early repayment usually free
• Some have arrangement fee (£100-£200)

Decision Framework

Choose PCP If:

1. Monthly budget priority
2. Change cars every 2-4 years
3. Under 10,000 miles/year
4. Keep cars in excellent condition
5. Like latest models
6. Want flexibility
7. Dealer purchase

Best example:

• Young professional
• £300 monthly budget
• 8,000 miles/year
• Changes cars every 3 years
• Latest tech important

Choose HP If:

1. Want to own car
2. Higher mileage (12,000-20,000/year)
3. Keep cars 5-8 years
4. Can afford higher payment
5. Want straightforward finance
6. No restrictions important

Best example:

• Family driver
• £500 monthly budget
• 15,000 miles/year
• Keeps cars 7 years
• Wants ownership

Choose Personal Loan If:

1. Good credit score (700+)
2. Want best total value
3. Buying privately
4. Keep cars 7+ years
5. Want immediate ownership
6. Maximum flexibility

Best example:

• Experienced buyer
• £600 monthly budget
• Buying £20,000 used car privately
• Excellent credit
• Keeps cars 10 years

Making Your Decision

Questions to Ask Yourself

Financial:

1. What can I afford monthly?
2. Do I have deposit saved?
3. What's my credit score?
4. What's my total budget?

Usage: 5. How many miles/year will I drive? 6. Will I keep car well maintained? 7. How long will I keep car? 8. Do I need flexibility?

Preferences: 9. Is ownership important? 10. Do I want latest models? 11. Can I handle restrictions? 12. What's my priority?

Red Flags to Avoid

Bad deals:

• APR over 15%
• Hidden fees emerging late
• Pressure to sign immediately
• Unwillingness to explain terms
• "Special deal" expiring today

Wrong choices:

• PCP with 20,000 miles/year
• HP if changing cars every 2 years
• Personal loan with bad credit
• Any finance you don't understand

Summary

Key Takeaways:

PCP:

• Lowest monthly payment (£329)
• Great for frequent changers
• Mileage restrictions apply
• Expensive if keeping long-term

HP:

• Middle monthly payment (£548)
• Straightforward ownership
• No mileage limits
• Most expensive total cost

Personal Loan:

• Highest monthly payment (£586)
• Best total value if keeping
• Immediate ownership
• Maximum flexibility

Best value long-term:

• Personal loan (if good credit)
• Own immediately
• No restrictions
• Often lowest total cost

Lowest monthly:

• PCP wins
• But perpetual payments
• Never own unless pay balloon

Most flexibility:

• PCP (can return)
• Personal loan (own immediately)
• HP least flexible

The right choice depends on:

• Your budget
• Usage patterns
• Ownership goals
• Credit score
• Personal circumstances

Most important:

• Understand total cost, not just monthly
• Read all terms carefully
• Calculate your specific scenario
• Choose based on facts, not emotions
• Never sign under pressure

The best finance option is the one that matches your specific circumstances, budget, and plans for the car. There's no universally "best" option - only what's best for you.