PCP vs. HP

If you’re planning on purchasing a new or used car on finance, it can be challenging to know which is the best option. At Pentagon, we offer a wide range of tailored finance solutions, including flexible PCP and HP deals.

Below, we explore the main differences between Personal Contract Purchase (PCP) and Hire Purchase (HP). Additionally, if you have any questions about our finance products, our team are available to guide you through the process. Read on below for a direct comparison of PCP vs. HP.

PCP or Personal Contract Purchase finance is a popular and flexible funding solution when purchasing a new vehicle.
Explore PCP Finance

PCP stands for Personal Contract Purchase.

Personal – The agreement is for individual users rather than businesses

Contract – You agree to a contract over a fixed term, for example, between 24 and 48 months

Purchase – There’s an option to purchase the vehicle at the end of the agreement

When choosing a PCP finance deal, you first pay a deposit (suited to your budget). Then, select the duration of the agreement. This can vary from 24-48 months but can be more or less if required. Next, you choose your annual mileage which is typically around 6,000-10,000 miles but customisable to your requirements.

Your annual mileage and term length then determine how much you pay each month. Finally, at the end of the contract, there is a balloon payment if you wish to own the car outright. Otherwise, you can hand it back.

With PCP, you’re paying for the loss in value (or depreciation) of your car. The optional balloon payment is what your lender estimates your car to be worth by the end of your agreement, and is based on your loan term and annual mileage. Because you’re covering the cost of depreciation, monthly payments are typically lower than other types of finance.

There may be charges for exceeding your annual mileage.

This type of finance is suitable for anyone looking for low monthly costs with the option to purchase the vehicle at the end. However, PCP also offers an easy way to upgrade your car regularly.

The main benefits of Personal Contract Purchase finance are:

Low monthly payments

Monthly instalments are affordable and fixed. You know exactly how much you’re paying each month.

Flexible terms

Choose between 12 and 48 months or longer duration depending on your needs.

End of lease options

Decide whether to pay the balloon payment, hand the car back or trade it in for a brand new model.

Regular upgrades

Swap your vehicle in at the end of the term to get the latest models every few years.

Protected against inflation & depreciation

Monthly payments are fixed even if interest rates and depreciation fluctuate.

Gain equity

Some cars may be worth more than the lender’s estimate at the end of the term. If this is the case, you’re in equity and you can get an even better deal on your next PCP agreement by swapping it in.

HP or Hire Purchase is a type of finance where you pay the car’s total value over a fixed term with a deposit, monthly fees and a small option to purchase fee.

Explore HP Finance

With hire purchase finance, you are paying for the full value of the car. There’s no large end payment, monthly costs are usually higher than PCP and you own the car at the end of the deal.

Hire purchase works by first placing a deposit. This is flexible depending on your budget but is typically around 10% of the car’s value.

The deposit is deducted from the car’s value, and the remainder is split equally (plus interest) over the term which is usually 3-5 years.

At the end of the contract, there is a small option to purchase fee of around £100-£200. Pay this, and the car is yours.

HP is a great option if you’re looking to keep your car for longer than the finance term. There is also no mileage limit, and you own the vehicle outright at the end of the contract.

What does HP stand for?

HP stands for Hire Purchase.

Hire – The lender is the owner of the vehicle until it’s paid for in full.

Purchase – At the end of the agreement, you own the car.

The main benefits of Hire Purchase finance are:

Flexible terms

Choose between one to five-year agreements to suit your budget.

Low deposit

A low deposit of around 10% of the car’s value is needed.

Fixed payments and interest

Your monthly payments are locked in, so there are no surprise charges.

No mileage cap

No need to worry about excess mileage charges at the end of the contract.

Small option to purchase charge

Paying a nominal fee gives you ownership of the car.

Low-credit score friendly

The loan is secured against the car, so it means you may not need a high credit score to secure finance.

There are a few differences between PCP and HP finance. Below we’ve analysed each finance type to help you decide which option is best for you.

How it’s calculated

PCP: Your car payments cover the car’s depreciation rather than the full value. This uses a Guaranteed Minimum Future Value (GMFV), deducting the estimated value from the car’s price. Interest is also added to your finance amount, including the balloon payment.

HP: You’re paying for the car’s full value. The deposit is deducted from the car’s price, and the remaining amount is split equally over the agreed loan term. Interest is also added.

Deposit

PCP: The amount of deposit you put down is up to you. However, the larger the deposit, the less you pay in monthly instalments.

HP: The deposit is typically 10% of the car’s value. But, there is scope to adjust this according to your needs. Again, the higher the deposit, the lower your monthly costs.

Monthly payments

PCP: Monthly instalments are fixed and often low, with a larger balloon payment at the end of the agreement.

HP: Monthly payments are fixed but slightly higher than PCP instalments as you pay for the car’s total value over the term.

Duration

PCP: PCP agreements are usually between 12-48 months.

HP: HP agreements are generally between 48-60 months.

Final payment

PCP: There is an optional final balloon payment, also known as the Guaranteed Minimum Future Value (GMFV). This can be anywhere from a couple of thousand to £15k or more.

HP: There is a very nominal option to purchase fee, usually around £100-£200.

Mileage restrictions

HP: No mileage restrictions as you are paying for the full value of the vehicle.

PCP: Annual mileage agreed at the start. It affects the guaranteed future value and monthly payments. You’re charged if you breach this limit and typically pay per mile.

Owning the car

PCP: You have the option to buy the car by paying the final balloon payment at the end of the agreement.

HP: You own the car after the last instalment is paid, as long as you pay the option to purchase fee.

Settling early

PCP: There is an option to settle early if you have paid 50% of your finance agreement back. If you have paid less than 50%, an early settlement figure can be agreed to end it early.

HP: You can end the agreement early if you have paid half of your finance payments. Anything less, and there’s a settlement figure to pay for the difference, just like in PCP.

Additional charges

PCP: If you go over the agreed mileage, an excess charge per mile may apply. Additionally, if you decide to hand the car back at the end of the contract, it must meet the leasing company’s fair wear and tear policy. Any excessive damage will incur a fee.

HP: A nominal ‘option to purchase’ charge of between £100 - £200 is applicable at the end of the term.

We’ve explained the main differences between HP and PCP. Now we’ll explore what scenarios each type of finance is suited to.

Who is PCP finance for?

PCP finance is suitable for anyone looking for manageable monthly payments. Instalments tend to be lower than other finance options, which allows you to buy a better car for your money. With lower short-term deals, it’s also easy to regularly upgrade to the latest models.

Who is HP finance for?

HP is a great choice if you’re looking to own a car after your loan has ended. This enables you to spread the cost of the vehicle over a fixed period. Plus, there’s no balloon payment at the end.

*If you choose to pay the final payment.

**Not all HP agreements will have a final payment.

Choosing the right finance option for your needs can be difficult. However, Pentagon is on hand to guide you through the process.

Our SAF-approved specialists can advise on HP and PCP deals to ensure you have the best choice and value for money on your next purchase.

Our panel of accredited lenders offer:

• Fixed rates – Interest rates are locked in, so there is no need to worry about rate changes
• Low or no deposit – Secure your dream car with as little as £99. Some providers don’t even require a deposit at all
• Easy application – Our quick process means you can complete your application within a few minutes