UK Car Finance Options: PCP, HP, and Personal Loans Explained

Most UK car buyers use some form of finance - in fact, over 90% of new cars and 70% of used cars are purchased using credit. Understanding your options is crucial to making the right financial decision.

The Three Main Finance Types

1. Personal Contract Purchase (PCP)

2. Hire Purchase (HP)

3. Personal Loans

Each has distinct characteristics, costs, and suitability for different situations.

Personal Contract Purchase (PCP)

The most popular form of car finance in the UK, accounting for over 80% of new car finance deals.

How PCP Works

1. Choose your car - New or used
2. Pay deposit - Typically 10-20%
3. Agree contract length - Usually 2-4 years
4. Set annual mileage - e.g., 10,000 miles/year
5. Make monthly payments - Lower than HP
6. Three options at end:
   • Return car (nothing more to pay)
   • Pay balloon payment and keep car
   • Trade in for new PCP deal

The Balloon Payment

The key feature of PCP is the large final balloon payment (GMFV - Guaranteed Minimum Future Value):

Example:

• Car value: £25,000
• Deposit: £2,500 (10%)
• Balloon payment (GMFV): £10,000
• Amount financed: £12,500
• Monthly payments over 36 months

This balloon payment is calculated based on expected depreciation.

PCP Advantages

Lower Monthly Payments

• 30-50% lower than equivalent HP
• More affordable monthly budget
• Can afford more expensive car

Flexibility

• Return car at end (no further cost)
• Trade in for new car
• Buy car if you want to keep it

Protected Value

• GMFV guaranteed by finance company
• If car worth less, their problem
• If worth more, you benefit

No Depreciation Risk

• Finance company bears depreciation risk
• Walk away at end
• No negative equity if within mileage

PCP Disadvantages

Never Own the Car

• Unless you pay balloon payment
• Years of payments, nothing to show
• Always making car payments

Mileage Restrictions

• Typically 6,000-12,000 miles/year
• Excess mileage charges (10-20p/mile)
• Need to estimate accurately

Condition Requirements

• Must return in good condition
• Charges for damage beyond wear and tear
• Professional valet recommended

Expensive to Own

• Balloon payment + interest means high total cost
• More expensive than HP long-term
• Interest charged on balloon payment too

Exit Costs

• Early termination very expensive
• Must pay at least 50% of total amount
• Negative equity common

PCP Cost Example

£25,000 car, 7.9% APR, 36 months, 10,000 miles/year

• Deposit: £2,500
• Monthly payment: £329
• Balloon payment: £10,000
• Total if returned: £14,344
• Total if purchased: £24,344
• Interest paid: £1,844

Hire Purchase (HP)

Traditional car finance where you gradually buy the car over time.

How HP Works

1. Choose your car
2. Pay deposit - 10-30% typical
3. Monthly payments - Fixed term (12-60 months)
4. Own the car - After final payment
5. Option fee - Small admin fee (£100-£200)

HP Advantages

You Own It

• Become owner after final payment
• No balloon payment
• Asset on your balance sheet

No Mileage Limits

• Drive as much as you want
• No excess charges
• No condition requirements

Simpler to Understand

• Straightforward repayment
• No complicated options
• Clear ownership timeline

Cheaper Long-Term

• Lower total cost than PCP
• No balloon payment interest
• Better value if keeping car

HP Disadvantages

Higher Monthly Payments

• 30-50% higher than PCP
• Less affordable monthly
• May need cheaper car

Own Depreciation Risk

• You bear full depreciation
• Negative equity possible
• May owe more than car's worth

Early Settlement Costs

• Still expensive to end early
• Settlement figure can be high
• Limited flexibility

No Return Option

• Must complete payments
• Can't hand car back
• Committed to owning

HP Cost Example

£25,000 car, 7.9% APR, 48 months

• Deposit: £2,500
• Monthly payment: £548
• Final option fee: £150
• Total cost: £28,754
• Interest paid: £4,254
• You own the car

Personal Loan

Borrow money from bank, own car outright immediately.

How Personal Loans Work

1. Get approved for loan
2. Receive cash - Deposited in account
3. Buy car outright - Pay seller directly
4. Make monthly repayments - To loan provider
5. You own car - From day one

Personal Loan Advantages

Immediate Ownership

• You own car from start
• Registered keeper from day one
• No finance on vehicle

Strongest Negotiating Position

• You're a cash buyer
• Better discounts
• Can buy from private sellers

Lower Interest Rates

• Often 3-8% APR
• Cheaper than PCP/HP
• Good credit rewarded

Complete Flexibility

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

No Security on Car

• Car can't be repossessed
• Only secured on your creditworthiness
• More freedom

Personal Loan Disadvantages

Higher Monthly Payments

• Repaying full value
• No balloon payment
• No deposit from dealer

Bear Full Depreciation

• Car value drops
• Your loss entirely
• Risk of negative equity

Harder to Get Approved

• Credit check required
• May need good credit score
• Income verification needed

Shorter Terms

• Usually 1-5 years max
• Higher monthly cost
• Less flexibility on payment

Personal Loan Cost Example

£25,000 car, 5.9% APR, 48 months

• Loan amount: £25,000
• Monthly payment: £586
• Total cost: £28,128
• Interest paid: £3,128
• You own the car

Side-by-Side Comparison

For £25,000 car:

Feature	PCP (36m)	HP (48m)	Loan (48m)
Deposit	£2,500	£2,500	£0
Monthly	£329	£548	£586
Balloon	£10,000	£0	£0
Own car?	No*	Yes	Yes
Mileage limit	Yes	No	No
Total if keep	£24,344	£28,754	£28,128
Total if return	£14,344	N/A	N/A
Interest	£1,844	£4,254	£3,128

*Unless paying balloon payment

Which Finance Option is Best?

Choose PCP If:

• Want lowest monthly payments
• Change cars every 2-4 years
• Don't want depreciation risk
• Unsure about keeping car
• Want flexibility at end
• Happy never owning car

Choose HP If:

• Want to own the car
• No mileage restrictions needed
• Can afford higher monthly payment
• Keep cars long-term (5+ years)
• Want straightforward finance
• No balloon payment concerns

Choose Personal Loan If:

• Have good credit score
• Want best value long-term
• Buying from private seller
• Want immediate ownership
• No mileage/condition restrictions
• Maximum negotiating power

APR: Understanding the True Cost

APR (Annual Percentage Rate) shows the true cost including interest and fees.

Typical APR Ranges:

• New car PCP: 0-6.9% (manufacturer subsidized)
• Used car PCP: 7.9-12.9%
• New car HP: 5.9-9.9%
• Used car HP: 8.9-14.9%
• Personal loans: 3.0-9.9% (credit dependent)

0% Finance Deals

Common on new cars, but consider:

The Good:

• No interest charged
• Lowest possible cost
• Very attractive terms

The Catch:

• Often requires larger deposit (20-30%)
• May prohibit negotiating on price
• Limited to specific models
• May miss cash discount

Calculate which is better:

• 0% finance with full price
• vs 10% discount with 5.9% APR

Often the discount + low rate beats 0% + full price!

Getting the Best Finance Deal

Before You Apply

1. Check credit score - Know where you stand
2. Clear existing debts - Improve affordability
3. Save larger deposit - Reduces interest paid
4. Compare rates - Don't accept first offer
5. Calculate total cost - Not just monthly payment

During Application

6. Be honest - Accurate information crucial
7. Don't multiple apply - Hurts credit score
8. Negotiate APR - Especially with dealer
9. Read small print - All terms and conditions
10. Check for fees - Admin, option, early settlement

Red Flags

Avoid if you see:

• APR above 15%
• Unwillingness to explain terms
• Pressure to sign immediately
• Hidden fees appearing late
• Terms that seem unclear

Deposit Considerations

How Much Deposit?

Minimum: Usually 10% Typical: 10-20% Recommended: 20-30%

Benefits of Larger Deposit:

• Lower monthly payments
• Less interest paid
• Better approval odds
• Lower total cost
• Less negative equity risk

Warning: Never borrow deposit money or use high-interest credit card. Deposit should come from savings.

Mileage Calculations (PCP)

Getting mileage wrong costs money:

Excess Mileage Charges

• Economy cars: 5-10p/mile
• Standard cars: 10-15p/mile
• Premium cars: 15-25p/mile

Example:

• Agreed: 10,000 miles/year (30,000 total)
• Actual: 15,000 miles/year (45,000 total)
• Excess: 15,000 miles × 15p = £2,250 charge!

Calculating Your Mileage

Average UK mileage: 7,400/year

Add these:

• Daily commute × 2 × 230 days
• Weekly shopping trips
• School runs
• Leisure/weekend driving
• Annual holiday mileage

Add 20% buffer for unexpected journeys.

Early Termination

All finance has early settlement options, but costs vary:

Voluntary Termination

• Available on HP and PCP
• Must pay 50% of total amount
• Can hand car back
• No further payment (if not damaged)

Early Settlement

• Pay off remaining balance
• Usually discounted interest
• Freedom from finance
• Own car immediately

Summary

Best Value Long-Term: Personal loan (if you have good credit)

Lowest Monthly Payments: PCP (but more expensive long-term)

Straightforward Ownership: HP (clear path to owning)

Most Flexibility: PCP (return or keep option)

Best for Frequent Changes: PCP (change every 2-4 years)

Best for Long-Term Ownership: Personal loan or HP

Remember: the best finance option depends on your circumstances, not which has the flashiest advert. Calculate total cost, consider your plans, and choose what genuinely works for your situation.

Never sign finance agreements under pressure. Take time, read everything, calculate total costs, and make an informed decision.