PCP vs HP explained
How the balloon payment works, why PCP monthlies are lower, the voluntary-termination 50% rule, mileage limits — and how to choose between the two.
Two ways to finance a car
Most UK car finance is one of two products: Hire Purchase (HP) or Personal Contract Purchase (PCP). Both are loans secured on the car, with a deposit and fixed monthly payments. The difference is what you're paying off — and whether you own the car at the end.
Hire Purchase: pay it all, own it
With HP you finance the whole price minus your deposit and spread it across the term. Each payment chips away at the full balance, and when the last one clears, the car is automatically yours — nothing left to decide. Monthly payments are higher than PCP because you're paying off the entire car.
PCP: finance the depreciation, decide later
PCP only finances the car's expected depreciation — the value it loses during the deal. The lender sets a balloon payment (the Guaranteed Minimum Future Value, or GMFV): a guaranteed estimate of the car's worth at the end, parked until the final month. Because you're not paying that chunk off during the term, the monthly payments are lower.
At the end of a PCP you have three choices:
- Hand it back and owe nothing further (subject to mileage and condition).
- Pay the balloon to keep the car outright.
- Part-exchange — any value above the balloon becomes equity towards your next deposit.
Side by side
| PCP | HP | |
|---|---|---|
| Monthly payment | Usually lower | Usually higher |
| Final (balloon) payment | Yes — optional to pay | None |
| Ownership at the end | Only if you pay the balloon | Yes, automatically |
| Mileage limits | Yes — excess charged per mile | Usually none |
| Hand the car back | Yes — a normal end-of-deal option | Not the main route |
| Best for | Lower payments, changing cars often | Keeping the car long-term |
Voluntary termination: the 50% rule
Both PCP and HP are regulated by the Consumer Credit Act, which gives you a valuable right: once you've paid 50% of the total amount payable, you can end the agreement, return the car to the finance company and walk away — provided it's in reasonable condition.
Watch-outs before you sign
- Mileage limits (PCP): go over the agreed annual mileage and you pay an excess charge per mile when you hand the car back.
- Condition charges (PCP): “fair wear and tear” is allowed; dents and damage beyond that are charged.
- Fees: watch for an arrangement fee and an option-to-purchase fee on PCP.
- Buying outright? A personal loan lets you own the car from day one and can work out cheaper — compare the total cost.
Frequently asked questions
What is the difference between PCP and HP?
With Hire Purchase (HP) you spread the full price (minus deposit) over the term and own the car automatically at the end. With Personal Contract Purchase (PCP) you only finance the car’s expected depreciation, leaving a large “balloon” payment at the end — so monthly payments are lower, but you only own the car if you choose to pay that balloon.
What is a balloon payment (GMFV)?
On a PCP, the balloon — formally the Guaranteed Minimum Future Value (GMFV) — is the lender’s guaranteed estimate of what the car will be worth at the end of the deal. You only pay it if you want to keep the car. It’s why PCP monthlies are lower than HP: you’re not paying off that chunk during the agreement.
Is PCP or HP cheaper?
PCP has lower monthly payments but, if you pay the balloon to keep the car, the total cost to own is usually similar to HP — sometimes a little more once interest on the balloon is included. PCP buys flexibility; HP gives certainty that the car is yours at the end with nothing left to pay.
What is voluntary termination?
Under the Consumer Credit Act, once you’ve paid 50% of the total amount payable (which on a PCP includes the balloon), you have the legal right to hand the car back and walk away, as long as it’s in reasonable condition. It’s a protection worth knowing about if your circumstances change.
What happens at the end of a PCP?
You have three choices: hand the car back and owe nothing further; pay the balloon to keep it; or part-exchange — if the car is worth more than the balloon, that equity can go towards the deposit on your next car.
Compare PCP and HP on your own car, deposit and APR.
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