Guide · Everyday Finance
PCP vs HP: Which Car Finance Deal Actually Costs Less?
More than 90% of new cars in the UK are sold on finance, and the vast majority of those deals are either PCP or HP. The monthly payment on PCP looks tempting — but the total cost tells a different story. Here is how both products work and what they actually cost you.
How PCP works
Personal Contract Purchase (PCP) splits the car's value into three parts: a deposit, a series of monthly payments, and a final balloon payment called the Guaranteed Minimum Future Value (GMFV). The GMFV is the predicted value of the car at the end of the agreement — set by the lender at the start based on the car model, term, and agreed mileage.
Your monthly payments cover only the depreciation — the difference between what you paid for the car and what it will be worth at the end — plus interest on the outstanding balance. Because the GMFV is deferred to the end, your monthly payments are lower than HP. However, you are still paying interest on the GMFV throughout the agreement, even though you have not reduced that debt.
At the end of a PCP you have three options: hand the car back (if in good condition and within mileage), pay the balloon to own it, or use any positive equity (if the car is worth more than the GMFV) as a deposit on a new deal.
How HP works
Hire Purchase (HP) is simpler. You pay a deposit, then monthly instalments that repay the entire cost of the car plus interest, spread over the agreed term. When you make the final payment you own the car outright — no balloon, no decision to make, no mileage limits to worry about.
Because you are financing 100% of the depreciation (rather than deferring a large chunk to the end), monthly payments on HP are higher than PCP for the same car at the same APR. But you are clearing the debt faster and paying less total interest as a result.
Side-by-side comparison: £25,000 car
The table below compares PCP and HP for the same £25,000 car over 36 months at 8.9% APR with a 10% deposit. The PCP deal assumes a GMFV of £12,500 (50% of car value — typical for a popular mid-range model).
| PCP | HP | |
|---|---|---|
| Car price | £25,000 | £25,000 |
| Deposit (10%) | £2,500 | £2,500 |
| Amount financed | £22,500 | £22,500 |
| GMFV (balloon) | £12,500 | None |
| Monthly payment | ~£284 | ~£529 |
| Total monthly payments | ~£10,224 | ~£19,044 |
| Balloon payment | £12,500 | — |
| Total cost (to own) | ~£25,224 | ~£21,544 |
| Total interest paid | ~£2,724 | ~£1,544 |
PCP's monthly payment is £245 lower, but if you pay the balloon to keep the car you pay roughly £1,180 more in total interest. The PCP payment looks affordable but the true cost of ownership is higher. The PCP only “wins” if you hand the car back at the end — but then you have nothing to show for the payments.
Mileage limits and restrictions on PCP
PCP agreements include a mileage cap because the GMFV (balloon) is calculated assuming a certain number of miles driven. High-mileage cars are worth less, so exceeding the limit reduces the car's residual value below the guaranteed figure — a loss the lender protects itself from with excess mileage charges.
Standard limits are 8,000, 10,000, or 12,000 miles per year. Excess charges typically run at 5–15 pence per mile. At 10p/mile, driving 5,000 miles over your limit over a 3-year agreement costs £500 at handback. You can often negotiate a higher mileage allowance upfront — the trade-off is a lower GMFV and therefore higher monthly payments, making PCP less of a bargain.
HP has no mileage restrictions at all. You own the car at the end, so its residual value is your asset not the lender's. This makes HP significantly better value for drivers who cover more than 12,000 miles per year.
Frequently asked questions
Which is cheaper overall — PCP or HP?
HP is almost always cheaper in total cost. With PCP you pay interest on the balloon payment (GMFV) throughout the agreement even though you have not cleared it, and if you then pay the balloon to keep the car you pay a large lump sum of interest-bearing debt at the end. HP charges interest only on the amount you are actually paying off, so the total interest is lower. The monthly payment is higher on HP, but the total amount repaid over the term is typically several thousand pounds less than PCP for the same car.
What happens at the end of a PCP?
At the end of a PCP agreement you have three choices. First, you can hand the car back to the dealer — you owe nothing more as long as the car is in good condition and within the agreed mileage. Second, you can pay the balloon payment (the Guaranteed Minimum Future Value) to own the car outright — this is often several thousand pounds. Third, if the car's actual market value exceeds the GMFV, you can use that positive equity as a deposit on your next PCP deal. If the car is worth less than the GMFV, you simply hand it back and walk away.
Can I sell the car during a PCP or HP agreement?
Technically you cannot sell the car during a PCP or HP agreement because the finance company owns it until the final payment is made. However, you can settle the agreement early using a voluntary termination right (under Section 99 of the Consumer Credit Act) once you have paid 50% of the total amount payable — you can then hand the car back with no further payments. Alternatively, a dealer can ‘settle’ your finance when you part-exchange, paying the outstanding balance and adjusting the deal accordingly. You should never privately sell a car on outstanding finance as this is illegal.
What are the mileage restrictions on PCP?
PCP agreements almost always include a mileage cap, typically between 8,000 and 12,000 miles per year (though you can negotiate higher limits in exchange for a lower GMFV and higher monthly payment). Exceeding the agreed mileage incurs a per-mile excess charge, typically 5–15 pence per mile. On a 10,000-mile annual limit exceeded by 5,000 miles at 10p/mile, that is a £500 excess charge at handback. If you drive more than 12,000 miles a year, HP or outright purchase is likely more cost-effective than PCP.