Hire purchase
With hire purchase you pay a deposit, then the rest of the price plus interest in equal monthly payments. The lender owns the car until the last payment (sometimes with a small option-to-purchase fee), and then it’s yours. There’s no mileage limit, because the lender isn’t relying on the car’s value at the end.
Personal contract purchase
With PCP, a big part of the price, the final payment (often called the balloon or guaranteed minimum future value), is left until the end. The monthly payments only cover the rest, so they’re lower. But you pay interest on the whole amount borrowed for the whole term, including the part you haven’t paid off yet. At the end you choose to:
- pay the final payment and keep the car
- hand the car back and pay nothing more, apart from excess mileage and damage charges
- part-exchange it, using any value above the final payment towards your next car
PCP deals come with an annual mileage limit and conditions on the car’s condition, because the final payment is based on what the car will be worth. See how a PCP final payment is set.
The same car both ways
A £25,000 car with a £3,000 deposit, borrowing £22,000 at 9.9% APR over 48 monthly payments:
| PCP | Hire purchase | |
|---|---|---|
| Monthly payment | £381.67 | £552.47 |
| Final payment | £10,000.00 | None |
| Total amount payable | £31,320.16 | £29,518.56 |
| Interest (charge for credit) | £6,320.16 | £4,518.56 |
| You can hand it back from | Month 34 | Month 22 |
PCP is £170.80 a month cheaper, but costs £1,801.60 more in interest, and the car is only yours if you pay the £10,000 at the end. The PCP figures assume the final payment is due a month after the last monthly one, which is usual.
Handing the car back
With both, the Consumer Credit Act lets you end the agreement and return the car once you’ve paid half the total amount payable (sections 99 and 100). On PCP that total includes the final payment, so you reach half much later. In the example you’d reach it at month 34 on PCP and month 22 on HP. See voluntary termination.
Which suits you
- HP can suit you if you want to own the car and keep it for years, or you drive a lot. It costs less interest overall.
- PCP can suit you if you want lower monthly payments and expect to change cars every few years. Budget for the final payment, or for handing the car back in good condition and within the mileage.
Leasing (personal contract hire) is different again: you never own the car. This is information, not financial advice, and we don’t recommend lenders or deals. Compare the APR and the total amount payable on each quote.