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17th March 2025 
36 min read 
PCP is the most common form of car finance in the UK market, but there’s a decent chance you may not know much about it outside of it being a type of car finance deal. With that in mind, we thought a comprehensive guide to all things PCP might help.
In this guide, you’ll find answers to the most commonly asked questions about PCP, covering:
- The basics
- How PCP works
- Your options at the end of a PCP deal
- Applying
- The financial elements
- The key terms and conditions
- Whether it’s right for you
You can jump to any section or single question you want the answer to using the links above or the search bar on the left-hand side. Of course, if you’d rather speak to someone, you can always get in touch with us, too.
The Basics
What does PCP stand for?
PCP stands for personal contract purchase. There are two other types of car finance with similar acronyms: hire purchase (HP) and personal contract hire (PCH). We talk about both later on in the guide.
What is PCP car finance?
PCP is a type of car finance agreement that gives you the option to purchase the car at the end of your contract. In simple terms, it’s effectively a long-term car rental, with the option to buy it at the end.
The structure of a PCP deal is similar to that of a PCH or hire purchase agreement. In all three, you’ll typically pay an upfront deposit followed by a series of fixed monthly payments for the duration of your contract (usually 24-48 months) – however, the main difference between the three lies in how each deal ends.
With PCH, you give the car back. With hire purchase, you’re always paying towards owning the car. PCP lies in between the two, with the option to buy the car (via a final payment called the balloon payment), give it back or, if you’ve paid enough into the agreement, part exchange it as part of a new deal.
Is PCP a type of lease?
No, PCP is different from a lease because of the option to buy. When we talk about a car lease – where you rent the car for an agreed period and give it back at the end of the deal – we’re talking about personal contract hire (PCH). Referring to PCP as a lease is a common mistake because of the similarities between the two.
How PCP Works
How does PCP work?
Your typical PCP deal can be broken down into three financial parts:
1. Deposit
This is an upfront payment that’s usually around 10% of the car’s value, depending on the lender and the car you’re considering.
You can usually adjust the deposit amount to suit your budget. You can pay more upfront to lower your monthly payments or, if you don’t have a lump sum to put down, go for a no-deposit deal, which spreads the deposit amount out across your contract with higher monthly payments. If you go no-deposit, just bear in mind the higher monthly payments that will follow.
2. Monthly payments
You’ll pay a series of fixed monthly payments for the duration of the deal. Most PCP deals last 24-48 months but can be as short as 12 months or as long as 60. It’s up to you how long you want your deal to last. A longer deal usually means lower monthly payments, but this isn’t always the case.
Monthly payments are calculated based on a couple of things:
- The vehicle’s current value versus a predetermined Guaranteed Future Value (GFV). GFV estimates what the vehicle’s value will be at the end of the contract. Lenders use this calculation to figure out how much the car will depreciate (lose value) over the course of the deal, which they then apply to the monthly pricing. Therefore, your monthly payments effectively cover the cost of the car’s loss in value while you use it.
- The interest rate on the deal (find out how PCP interest is calculated here).
3. Balloon payment
The balloon payment is an optional one-off payment that’s available to you at the end of your deal. It’s usually fairly big – as much as 50% of the contract – but you only need to pay this if you want to own the car.
Because of the lump sum required, it can be tough to make the balloon payment – in fact, most people don’t. Instead, you have the following options:
- Pay the balloon payment: once this is paid in full, the car is yours.
- Refinance the balloon payment: if you want to own the car but don’t have the money to pay right away, you can ask your lender to break down the cost of your balloon payment and spread that cost over an agreed term.
- Part exchange/trade-in: at the end of your PCP contract, your vehicle’s market value will often be higher than the remaining GFV (this isn’t always guaranteed). This is known as positive equity, which can be used as a deposit on a new car on a brand-new PCP deal. This is a popular option among PCP users, as it allows them to get a new car every few years and soften the blow on the upfront deposit on the new deal.
- Give the car back: you can also hand the vehicle back and walk away free of charge – assuming you don’t owe any excess mileage or damage fees.
What is a balloon payment?
A balloon payment is an optional one-off payment that can be made at the end of the deal to take ownership of the vehicle.
The key thing to remember with a balloon payment is that you don’t need to pay it. In fact, you have several options available to you at the end of your PCP deal. Take a look at section 3 directly above for more details.
How does PCP work when changing car?
One of the big benefits of PCP is the flexibility of your options in the later stages of the agreement, and this flexibility applies to changing car.
The most common way of changing car on PCP is via part exchange, but there are a few ways you can switch your vehicle both during and at the end of your deal:
- You can part-exchange your current vehicle against a new car on a new deal – as long as you have positive equity (take a look at the next question for more on part exchange).
- You can request a settlement figure (how much you’d need to pay to get out of the deal early) from your lender before the end of your deal. If this figure is lower than the car’s current value, you can use the positive equity as trade-in value. If it’s higher, you’ll need to pay the difference to exit the deal.
- You can pay the balloon payment and take ownership of the car, then sell it or part-exchange it with its full market value.
- If you’ve paid at least 50% of the total amount payable on your deal, you can voluntarily terminate your deal under the Consumer Credit Act. You can then return the car and be free to move on.
Can you part exchange a car on PCP?
Yes, but you’ll need positive equity in your vehicle – where the vehicle’s value is greater than the amount you have left to pay – to do so.
On a PCP deal, you’ll typically – but not always – find that once you get towards the end of your deal, the car is worth more than the GFV. If it is, you can use the difference as a deposit on a new car on a new PCP deal.
Can I change my car on PCP early?
Yes, but as mentioned above, you’ll need positive equity in your vehicle to do so without paying anything.
If you want to settle your finance deal early, you can request a settlement figure from your lender. This will tell you how much you need to pay to exit the deal. If this amount exceeds your car’s current value, you’ll need to pay the difference. If it’s less, you should be able to trade in your car early and use that difference as a discount on a new deal.
Can you sell a PCP car?
The car is only yours if you pay the final balloon payment in full. Once you’ve done this, the vehicle is yours to do what you want with, including selling it. Otherwise, the vehicle is the lender’s property throughout the agreement, meaning it’s not yours to sell.
Options at the End of a PCP Deal
How does PCP work at the end of the term?
Unlike personal contract hire and hire purchase deals, PCP comes with options at the end of the contract. You can:
- Take ownership of the car by paying the final balloon payment.
- Part-exchange your vehicle (as long as you’ve got positive equity in it) towards a new deal.
- Give the car back and walk away, with no further obligation.
If you’d like to know more about the balloon payment, it’s covered here. For part exchange, it’s here.
What happens to my deposit at the end of a PCP deal?
The ‘deposit’ you pay at the beginning of your deal is part of your payment towards the use and potential ownership of the vehicle, so you don’t get it back, unfortunately.
In reality, your ‘deposit’ is really an ‘initial payment’ – it’s just that the industry has chosen to use the former over the latter to describe the upfront lump sum. Confusing stuff, admittedly.
Can you end a PCP early?
Yes, you can, but how that works largely depends on how much you’ve paid into your deal. Your options to end early are:
Early settlement
If you want to pay off your PCP deal early but you aren’t sure where you stand, you can request a settlement figure from your lender. This settlement figure will tell you how much you must pay to exit the contract. If the settlement figure is greater than your car’s current value, you’ll need to pay the difference to end your contract. But if your vehicle’s current value is more than the settlement figure, you shouldn’t have to pay anything because you have positive equity in the vehicle.
Having positive equity on a PCP deal means your car is worth more than the amount you still owe on the deal. Many PCP users find themselves in this position towards the end of their contract. However, positive equity isn’t guaranteed as it depends on various personal and market factors – like whether you’ve kept the car in good condition, how well it’s held its value and market demand.
If you do have positive equity, not only will you not need to pay anything to move on from your existing PCP agreement, but you’ll also be able to use the difference as a deposit on a new deal, should you want one.
Voluntary termination
Under the Consumer Credit Act, you can terminate your PCP agreement if you’ve paid 50% or more of the total amount payable. This is known as a voluntary termination or mid-term exit.
It’s important to note that ending a deal via voluntary termination will leave a marker on your credit report. You’ll also lose use of the vehicle and need to return it to the lender immediately – and you’ll need to return it in good condition to avoid any charges.
Is there a penalty for paying off PCP early?
Usually, yes. Just as if you were to try and pay off your mortgage early, your lender will likely charge early repayment fees to make up for the interest they’ll lose on your concluding the deal ahead of schedule.
Early repayment fees on PCP deals are usually made up of a few months’ interest. There may also be an admin fee to handle the cancellation. Both will be detailed in your contract.
Can I extend my PCP agreement?
This is something that depends on your lender, but more often than not, you’ll be able to organise some form of extension. It may also depend on why you need an extension – for example, you may need more time to pay off the total amount left, or you might be waiting on a new vehicle that’s been delayed.
Whatever you need an extension for, you’ll probably need to speak to your provider and work something out, as extension criteria won’t typically be mentioned in your contract. Depending on your circumstances and your provider’s policy, you may be offered anything from a 12-month extension to a settlement offer to end the deal on time.
Does a PCP settlement figure include the balloon payment?
Yes, your settlement figure will include everything that’s left to pay on the agreement: the balloon payment, unpaid monthly fees, interest and any additional fees for early settlement as stated in your contract.
Can you PCP a used car?
Absolutely. PCP is a very common method of financing used cars, and the same concepts of flexibility and affordability apply. Most of our used car leasing deals can be renegotiated to a PCP agreement if that suits you better.
How does PCP work on used cars?
The process is the same as how a new PCP deal would work: deposit, monthly payments and a final balloon payment. However, some things might be different:
- Your monthly repayments should be lower because the depreciation on the vehicle (most of which happens within the first three years) is less severe.
- Loan terms are often shorter because the guaranteed future value (GFV) is more difficult for the lender to estimate on used vehicles over a longer term.
- You might find no-deposit options thinner on the ground. A 10% or higher deposit is often expected.
- Some key terms and conditions of your typical PCP contract may be applied differently.
How old can a car be for PCP?
Most leasing providers won’t do anything older than four or five years for a PCP deal. This is because predicting the GFV of the vehicle accurately gets increasingly more difficult as the vehicle gets older, posing a risk to the lender.
In some circumstances, you might find PCP deals available on older vehicles. Just be wary of interest rates.
Applying for PCP
How old do you need to be for PCP?
In almost all circumstances, you’ll need to be at least 18 years old to finance a car, whether that’s PCP, PCH or hire purchase.
Can you get PCP with bad credit?
Yes. Bad credit leasing and financing is a massive part of what we do at Hippo, as we’re big believers in the idea that everyone should be able to get a deal that works on a car they want.
Of course, there are limits to who we can help – and it always helps to have good credit when it comes to getting access to better deals, but poor credit PCP deals are absolutely available.
What credit score do you need for PCP finance?
There’s no universal number for the credit score you need to secure a PCP deal. Many lenders may have certain numbers for who is accepted or gets access to better interest rates and such, but you’ll find most providers work with a panel of lenders (including some who may be bad credit specialists) to try and ensure you not only get offered a deal but the best possible one based on your circumstances.
Your credit score is also not the only thing that matters when a lender is deciding whether they want to lend to you. It’s a big part of the decision-making process but is weighed up alongside other important factors like:
- How much you want to borrow/deposit: the more you want to borrow, the higher the risk and the less likely you are to be accepted. Likewise, the more you can put down upfront, the lower your remaining amount payable – and risk – will be.
- How long you want your contract to be: for bad credit users, there’s often a balance to be found between too short a contract (meaning higher monthly payments and higher risk) and too long a contract (more interest and higher chance of financial instability).
- The car you want: a used car PCP deal is a good option for bad credit customers as it carries a lower total cost and less risk.
- Whether you have a guarantor: having a guarantor – someone who signs the contract with you and agrees to cover your payments in the event you can’t make them – can reduce risk and increase your chances of approval.
We’ve got a guide to credit scores and car finance if you want to know more.
Does PCP affect your mortgage?
PCP is a type of financial agreement and, like any other financial agreement, can affect a mortgage application positively or negatively depending on how you manage your deal.
If you have an existing PCP deal in place, mortgage lenders will also take it into consideration as an additional financial commitment and affordability factor, i.e. will you be able to afford both at the same time?
Financial Elements of PCP
Can you make overpayments on PCP?
Overpayments (paying more than you need to) on your PCP deal can offer a number of benefits but potentially a few negatives, too, depending on your lender’s policy. If you want to do it, the first things to check are:
- Whether your lender accepts overpayments.
- If there are any additional fees for early repayment.
- How overpayments would affect your balance – for example, would they reduce your monthly payments or just the total owed?
If you get the green light, there are two types of overpayment you can make (again, lender-dependent):
- A lump sum payment that reduces your remaining balance.
- Regular overpayments on top of your usual monthly instalments.
You’ll also need to consider how these payments affect your deal:
- While your overpayments are reducing the total amount owed, are they reducing the total interest owed (which means your monthly payments stay the same) or your monthly instalment amount?
- Are they shortening your contract length, and if so, will shortening your deal come with any early repayment fees?
- Will overpayment move you into positive equity?
- Overpayments will not affect your final balloon payment, only your interest and/or your monthly instalments.
There’s also early settlement to consider, which is explained here.
What happens if I can’t pay my balloon payment?
The balloon payment is an optional payment that you only need to pay if you want to take ownership of the car after your deal ends. If you can’t make that payment, you have three options:
- If you want to own the car, request to refinance the balloon payment to spread the cost.
- Use any positive equity you have on the vehicle as a deposit on a new deal.
- Give the car back and walk away.
We go into a little more detail on all three of these options in section 3 of this question.
Can you negotiate a balloon payment?
You can certainly try, but answers may range from a firm ‘no’ to options on extending the loan term, adjusting the interest rate or lowering the amount.
Unfortunately, the first answer is probably the most likely. But it doesn’t hurt to ask.
Can you refinance a PCP balloon payment?
Yes, you can. Refinancing the balloon payment essentially means taking out another loan to pay off the final amount rather than having to cough it all up in one often hefty lump sum.
It’s a good option if you want to buy the car and make your payments more manageable – but be aware a new loan means additional interest, so you will be paying more in total.
Can you refinance a PCP?
It’s lender-dependent, but you can sometimes refinance your PCP loan. You might want to refinance because:
- You want to spread the cost of your deal out over a longer term with lower monthly payments – or you want to shorten your deal with bigger monthly payments.
- You’ve found a lower interest rate elsewhere.
- You want to own the car quicker and can get an unsecured personal loan that pays off the contract and makes the car yours there and then.
What you’ll need to consider is:
- Refinancing, particularly if you’re doing it to extend your term and lower your monthly costs, means a new loan and likely more interest overall.
- Refinancing with another lender may incur exit charges from your existing deal.
Is it worth putting a big deposit down on a PCP?
If you’ve got it, absolutely. A big deposit will lower your monthly payments, making them more affordable throughout your contract. You’ll be borrowing less money, too, which means less interest will be owed. It’s also a big helper to bad credit customers who are looking to get accepted for a PCP loan, as more upfront means less to pay later and, therefore, lower risk to the lender.
Of course, even if you’ve got the money, you might prefer to keep a chunk now and take a lower upfront cost in exchange for higher monthly payments. It’s all down to your circumstances and what suits you best.
How does PCP interest work?
Lenders calculate PCP interest rates based on a number of factors:
- Your credit history: if you’ve got good credit, you’re more likely to be given a better rate because you’re considered lower risk. Those with poor credit may find they have to take on a higher interest rate.
- Whether you’re leasing new or used: new cars often have lower interest rates than used.
- Economic climate: wider interest rates and patterns in the UK economy will influence your PCP rate.
- Lender policy: some lenders have fixed interest rates, regardless of your credit history.
You can avoid paying more interest than necessary by:
- Having good credit.
- Paying more upfront, thereby reducing the amount borrowed for interest to be applied.
- Going for a new car (particularly if there are any interest incentives included) rather than used. Obviously, you’ll pay more for the car and loan themselves, but the interest will often be less.
Key Terms and Conditions of PCP
Who owns the car on PCP?
Until you pay off the full amount as stated by the agreement, including the balloon payment, the vehicle is the lender’s property. So, while you’re still paying off your contract, you can’t sell the car and must stick to the condition and mileage rules stated in your contract.
You can take ownership of the car by making the final balloon payment. Until then, it’s best thought of as a long-term rental with an option to buy at the end.
Who is the registered keeper of a PCP car?
‘Registered keeper’ and ‘owner’ are terms that often get mixed up and are sometimes considered the same thing. They’re not.
While the lender owns the car, you are the registered keeper of the vehicle. That means your name will be on the car’s V5C logbook and you can treat it as yours, but only on the lender’s terms (condition and mileage rules, for example).
What are the main terms and conditions with a PCP car?
The main terms and conditions you need to be aware of when getting a PCP deal are mileage and vehicle condition. Here’s a breakdown of both:
Mileage limits
You’ll notice when choosing a car on any leasing or financing website that part of the deal includes choosing an annual mileage limit. The thinking here is simple: the more mileage the car does, the more wear and tear and, therefore, the greater loss in value on the vehicle over the course of the term. So, the more mileage you want to do, the more you’ll have to pay monthly to cover the depreciation.
Typical yearly mileage figures for PCP sit somewhere in the 5,000-15,000 mark. If you exceed your annual mileage (it’s calculated as a total at the end of the deal, so four years at 10,000 miles a year would mean you’re not allowed to eclipse 40,000 miles at the end of the deal), you’ll have to pay mileage charges, which can be anywhere from 3p to 30p, depending on the vehicle.
Take a look at our guide to excess mileage charges if you’d like to know more about how they work and how you can avoid them.
Condition
You’re expected to keep the vehicle in good condition. That means your provider expects the car back with ‘fair wear and tear’ but nothing more. Most finance companies use the BVRLA’s Fair Wear and Tear guidelines to dictate what is and isn’t ‘fair’.
Some examples of fair wear and tear:
- ‘Minor’ scratches and chips.
- Even tyre wear down to the legal limit.
- ‘Minor’ interior scuffs and damage.
Some examples that are beyond fair wear and tear:
- ‘Major’ damage to the body, like dents and large scratches.
- Cracked or chipped windscreen.
- Tyre damage or tread below the legal limit.
- Stains or burns to the upholstery.
If your vehicle goes back with anything from the bottom category, you’ll have to pay for it – and costs can vary widely, so it can be worth looking to rectify anything you can before you return the car.
Our leasing wear and tear guide can help you get prepared for return day.
Can you modify a PCP car?
You can, but only with permission from your lender who is the owner of the vehicle until you make all payments. Modifications on a PCP car are a dangerous game, so you’ll need to be aware of the following:
- Whether you have permission from the lender to make modifications.
- What modifications risk breach of contract (clarify any proposed changes with your lender).
- What those modifications might affect your vehicle’s value and therefore your equity stake in it.
- What modifications could void the manufacturer warranty.
- What extra fees you might incur from any of the above.
- Whether you’ll need to revert the car to its original manufacturer condition before returning it.
With all of the above in mind, you’ll want to tread lightly with any mods – probably sticking to reversible changes like vinyl wraps or interior accessories.
Who pays for repairs on a PCP car?
As the registered keeper of the vehicle, you’re responsible for maintenance and repairs on a standard PCP contract. You’ll find many providers offer maintenance and servicing packages as optional extras and, naturally, at additional cost.
If you’re getting a new car, the manufacturer’s warranty will cover many significant areas of repair, plus you won’t need to worry about an MOT for the first three years.
With a used car with no manufacturer’s warranty, you’re responsible for everything – unless you get a maintenance package. Two key things you’ll need to remember are the MOT and servicing (a good idea if you want to return the car in good condition and avoid charges).
Can I cancel a PCP within 14 days?
In the UK, under the Consumer Credit Act, you get a 14-day ‘cooling-off’ period where you can cancel the finance. This typically begins on the day you sign the agreement. However, there are some things to bear in mind:
- You may have to pay a penalty, like a cancellation fee, if you do so.
- Car finance agreements that exceed £25,000 may have terms and conditions attached where the rules differ. Agreements that exceed £60,260 often void the right to cancel.
- Cancelling the finance doesn’t automatically mean the vehicle purchase is cancelled. If you want to keep the car, you’ll need to think of another way to pay.
Make sure you’re clued up on your finance company’s and broker’s rules on cancellation before you commit to any agreement.
Can I hand my car back early on PCP?
Yes, you can – but it may cost you to do so. There are a few options if you want to return your car early:
- Early settlement or voluntary termination, as explained here.
- Part exchange, as explained here.
- Refinancing to shorten your contract, as explained here.
Is PCP Right for You?
Is PCP a good idea?
That depends entirely on your personal circumstances. If you’re considering taking a vehicle on a finance deal like PCH or hire purchase, chances are PCP has something to offer you, too, but there are a few factors which may make it a better or worse idea than other options.
PCP might be a good idea if…
- You want the option – not the obligation – to buy the car at the end of the deal.
- You want to spread the deal’s cost over fixed monthly payments (except for the balloon payment at the end).
- You want affordable and manageable access to newer vehicles, with flexible access to changing vehicle every few years.
- You want as much flexibility as possible regarding mid- and end-of-term options.
- You don’t want the strictest mileage and condition limits that come with PCH deals.
- You want to try and generate equity in the agreement that you can potentially use at the end.
PCP might be a bad idea if…
- You know for sure what you want to do with the car at the end of the deal.
- You want the lowest possible total cost.
- You don’t want to deal with mileage and condition limits.
- You want to avoid equity risk – gaining positive equity in your vehicle isn’t always guaranteed.
Is PCP a waste of money?
There’s rarely going to be a situation where a PCP deal could be considered an outright ‘waste of money versus another finance deal, but there are instances where it would be a less suitable option than alternatives like buying, leasing or financing via hire purchase.
Here are a few big ones where PCP might not be the best use of your money:
- If you know exactly what you want to do with the vehicle at the end of the deal. If you know you want to own it, a hire purchase deal will probably be cheaper. If you know you’ll return the car, a lease will probably be cheaper.
- If you exceed the mileage limit you agreed to, excess mileage charges can add up quickly if you’re not paying attention.
- If you’re not going to keep the vehicle in good condition, you’ll need to pay for the necessary repairs.
- If you end the deal early, you might face early settlement fees.
- If you want to keep the same car for a long time, buying outright or financing via hire purchase will likely work out cheaper.
- If you have enough money to buy the car outright but go for PCP instead to spread the cost, it’ll cost you more in the long run.
- If you’re offered a high interest rate, you might be better off considering other finance options that offer lower or buying outright to avoid interest altogether.
It’s important to consider all of this before you get a new car.
Is PCP better than buying?
It all depends on what you want from your car, your budget and how much flexibility you need:
PCP might be better than buying if…
- You don’t have the money to buy outright and need to spread the purchase cost – or you’d prefer to spread the cost to avoid tying up a lot of cash in one go.
- You want to change your car every few years.
- You’re not sure you want to own the vehicle and would prefer the flexibility to make that decision later on.
- You want access to a better standard of vehicle that you wouldn’t be able to afford to buy in one.
Buying might be better than PCP if…
- You can afford to buy outright and want the lowest possible cost with no interest.
- You know you want to own the car.
- You’re happy to stick with the same car for a long time.
- You want to drive the car on your terms with no mileage or condition limits.
In short, PCP is better for lower monthly costs and flexibility, while buying outright is better for ownership and your long-term finances.
Is it worth buying the car at the end of a PCP deal?
Whether or not it’s a good idea to buy the car at the end of your contract comes down to your equity status in the vehicle, how much it’s worth in the market and, of course, your preferences around whether you actually like the vehicle and want to keep it:
You might want to buy the car if…
- The car’s current value is more than the balloon payment. That means you’re in positive equity, meaning even if you didn’t want the car, you could pay the balloon payment and then sell the vehicle for a profit immediately.
- You want to get rid of all of the obligations that come with a PCP contract, like monthly payments, mileage limits and condition requirements.
- You’ve taken good care of the vehicle and know you’re taking ownership of a reliable car rather than risking a new deal.
- You can afford the balloon payment – or can reliably afford to refinance it.
You might not want to buy the car if…
- The car’s current value is lower than the balloon payment. Buying in this scenario would mean you’re paying over market value.
- If you’d rather switch/upgrade cars and use whatever equity you have in your existing deal as trade-in value.
- You can’t afford the balloon payment or would struggle with refinancing it.
- If you know the car is starting to age or show signs of wear and tear.
With the above in mind, the big questions you need to ask yourself are:
- What is the vehicle’s current market value – and how does that stack up versus the balloon payment/GFV?
- Do you want to keep the same car or move on to something else?
- Regardless of the other two questions, can you afford the balloon payment?
What’s the difference between PCP and HP?
The main difference between PCP and HP is the buying condition at the end of the deal. With PCP, you have the option to buy. With HP, you’re always working towards buying the vehicle.
Because of that, there are a few differences in how the average PCP and HP deal are structured:
- There’s no balloon payment at the end of a HP deal. Instead, your last payment will be the same fixed amount as the rest of your monthlies across the deal, plus a small ‘option to purchase’ fee. Once you’ve paid that, the car is yours.
- HP monthly costs are typically a little higher than PCP because the cost of the agreement isn’t backloaded like a PCP deal which ends with a chunky balloon payment.
- Mileage and condition restrictions are usually less strict on a HP deal.
Is PCP or HP better?
Deciding whether PCP or hire purchase is better for you boils down to ownership and the factors surrounding it:
You might want to go for PCP over HP if…
- You want lower monthly payments.
- You’re not sure if you’ll want to buy the car or not and need the flexibility to walk away from the deal when it ends.
- You like the idea of upgrading your car every few years.
- You want to build equity in a deal without the absolute aim of ownership.
You might want to go for HP over PCP if…
- You know you want to own the car but can’t afford to buy it outright.
- You don’t want to deal with strict mileage limits and vehicle condition rules.
- You want largely fixed costs across the course of your deal with no big lump sum required at the end.
- You like the idea of keeping the same car for a long time.
What’s the difference between PCP and a lease?
We’ve got a guide to PCP vs PCH if you’d like an in-depth overview of the topic, but in short, leasing (personal contract hire, or PCH) differs from PCP because it’s an outright lease (rental) of the vehicle. You can’t buy the car at the end of a PCH agreement. You pay your last monthly payment and then hand the car back, and the deal is over. PCP, on the other hand, gives you three different options at the end of the deal: buy, part exchange or walk away.
Because of that, there are a few differences in how a typical PCH deal differs:
- The monthly payments – and total cost – will typically be lower than PCP.
- There’s no balloon payment at the end. You pay the last fixed monthly payment and hand the car back.
- Mileage and condition restrictions will be tighter than those on PCP.
- You don’t build any equity in the vehicle with PCH. You are paying to rent the car and nothing more.
Is leasing cheaper than PCP?
Yes, a leasing deal is normally cheaper than an equivalent PCP deal because there’s no option to buy and you’re not building any equity in the vehicle across the course of a PCH agreement. This is reflected in lower monthly payments and no big balloon payment at the end.
Where you can come unstuck, though, is with mileage limits and keeping the vehicle in a ‘fair’ condition. These restrictions are tighter on a PCH contract because the car is 100% being returned to the lender. So, if you get on the wrong side of these, a lease could end up being pricier.
Is PCP or leasing better?
The PCP vs leasing debate comes down to ownership and how you prioritise simplicity and flexibility in a deal:
PCP is usually better than leasing if…
- You want the option to own the car at the end of the deal.
- You’d like to build equity in the vehicle, which you can use at the end to part exchange towards a new deal.
- You want more flexibility in factors like ownership, mileage and keeping the vehicle in good condition.
- You don’t want to be tied down to a lease (PCP deals can be exited early via early settlement or voluntary termination).
Leasing is usually better than PCP if…
- You want the lowest monthly and total costs from a finance deal.
- You know you don’t want to own the vehicle at the end of the contract.
- You want to get the most ‘bang for your buck’ in terms of the car you can afford to drive.
- You want to upgrade your vehicle every few years.
- You don’t want to deal with potential ownership worries like depreciation, maintenance and resale.
Is PCP a good idea on used cars?
PCP is a very popular option on used vehicles and offers many of the same benefits of PCP financing a new car, plus a few others:
- You can spread the cost of your purchase.
- You have the same end-of-contract flexibility: buy, part exchange or walk away.
- Your costs, including your initial deposit and monthly payments, will be lower.
- Depreciation concerns are lower as most of a car’s loss in value comes in the first three years.
However, you do need to consider a few areas where PCP on a used car might not work for you:
- Used car PCP deals usually come with higher interest rates.
- The guaranteed future value (GFV) is harder to predict, meaning it’s more likely that making the balloon payment and taking ownership might not present the best value.
- If you want to use the car a lot, you’ll need to consider any mileage and condition restrictions stated by your PCP agreement – although these are usually much more lenient on a used deal.
If you’re considering a used car on PCP vs HP or PCH, the same pros and cons largely apply. For example, if you want to keep a used car long term, HP or buying outright remains the better option.
What’s a good PCP car finance agreement example?
Here’s an example of a simplified PCP deal that will give you a rough idea of how the terms might work out:
Car: BMW 3 Series 2025 (new)
Market value: £40,000
Deposit/initial payment (10%): £4,000
Loan amount: £36,000
Guaranteed future value (GFV)/balloon payment: £20,000 (assuming the vehicle depreciates by 50%)
Interest (APR) on the loan: 8%
Term: 48 months
Mileage limit: 10,000 miles per year
Monthly payment: £390.61
Total amount payable: £42,749
You can see from the example above that in exchange for the benefit of spreading the cost of the vehicle across four years with the option to buy, the total interest due is £2,749 – which is incorporated into the monthly payments.
You’d then have the following end-of-term options:
- Pay the £20,000 balloon payment to own the vehicle.
- Refinance the £20,000 balloon payment to spread the cost and take ownership of the vehicle.
- If the vehicle’s market value at the end of the term is more than the £20,000 GFV, you can use the positive equity as a part exchange deposit on a new deal.
- Return the car and walk away entirely (assuming there are no mileage or condition fees to pay).
Is PCP right for you? We can help
Still not sure whether PCP is the answer? The good news is we’re expertly positioned to help.
As a car leasing company that also does great PCP deals on all our vehicles, both new and used, we can walk you through the pros, cons, costs and key terms of how any PCP or PCH deal might look on the car you’re interested in.
Our leasing team have all the answers – all you need to do is give us a call.
DISCLAIMER: Customers should review the pre-contract information document (SECCI) before signing any agreement.
