PCP or hire purchase: which suits you

Personal contract purchase (PCP) and hire purchase (HP) are the two most common ways to buy a car on finance in the UK, and the choice between them comes down to one question: do you want to own the car at the end, or keep your monthly payments as low as possible?

With PCP, your monthly payments only cover the car's depreciation, so they are usually lower than HP¹. You pay a deposit, make monthly payments for a set term, then choose at the end whether to return the car, trade it in, or pay a final lump sum to keep it². With hire purchase, you pay a deposit and fixed monthly payments over one to five years, and at the end of the agreement you own the car outright³.

The trade-off is straightforward. PCP buys you a lower monthly cost and a decision to make later. HP buys you certainty and ownership, at a higher monthly price. Both are secured against the car, so missing payments puts the vehicle at risk⁴.

PCP gives lower monthly payments, HP gives you the car

The reason PCP costs less each month is that you are not paying off the whole car. Your payments cover the drop in the car's value while you are paying back the agreement, plus interest¹. The rest of the car's value sits in a final lump sum, sometimes called a balloon payment, which you only pay if you want to keep the car.

Hire purchase works more like a straightforward loan. The finance company pays the garage for the car, and you pay the money back in instalments with interest added¹². There is no lump sum at the end, which is why the monthly payments are usually higher than on PCP⁴. At the end of the term, the car is yours.

A worked example shows the gap. On a car worth £20,000 that a dealership expects to be worth £15,000 after three years, a three-year PCP means you pay £5,000 over the term, plus interest¹. The other £15,000 is the balloon payment if you decide to keep the car. On HP over the same period, you would be repaying the full £20,000 plus interest, which is why the monthly figure is higher.

PCP terms typically run for one to four years, while HP terms run for one to five years⁸. Both usually require a deposit of around 10% of the car's value⁶.

Who owns the car during the agreement

On both PCP and hire purchase, the finance company owns the car, not you. With HP or conditional sale, the finance company owns the car until you have made the last payment⁹. With PCP, the finance provider still owns the car throughout⁹. Vehicles bought on hire purchase or conditional sale do not belong to you until the final payment has been paid¹³.

This matters in practice for three reasons. First, you cannot sell the car without the lender's written permission, because you do not own it until the agreement is paid off¹⁴. Second, if the car is written off, the finance company is technically the owner and should be able to help you through the process¹⁵. Third, if you go bankrupt, the agreement may include a clause ending it, in which case the lender can repossess the vehicle and sell it, though some lenders may allow you to keep the car¹⁶.

There is one useful protection that comes with hire purchase. With HP, it is the finance provider rather than the dealer who is legally responsible to you if there are problems with the car¹⁷. That gives you a route to complain if the car turns out to be faulty.

Credit, affordability and identity checks

Both PCP and hire purchase are regulated credit agreements, and lenders must check that you can afford the repayments before approving you. Lending is subject to status and additional affordability checks¹⁸. That means the lender looks at your income, your existing debts and your credit history, not just your credit score.

Hire purchase and conditional sale agreements are regulated by the Consumer Credit Act 1974¹⁹. Some HP agreements are not regulated by the Act, mainly older, high-value agreements or agreements taken out by a business, and you do not have a right to end these agreements early²⁰. If you are a consumer taking out a normal car finance agreement, the Consumer Credit Act protections apply, and consumers taking out hire purchase agreements should not have lesser rights than consumers taking out other types of unsecured credit agreements²¹.

It is worth checking whether your hire purchase or conditional sale agreement includes Payment Protection Insurance. You may be able to make a claim for the insurance depending on the circumstances²⁰.

If you are turned down, the reason is usually your credit history or affordability. A refusal does not appear on your credit file in the same way a missed payment does, but the search itself is recorded.

Effect on your credit report

Both PCP and hire purchase appear on your credit report as credit agreements, and how you manage them affects your credit file. Missed payments and reduced payments may be recorded on your credit file²⁰. If payments are missed and the debt is not resolved, a county court judgment (CCJ) can follow, and a CCJ can make borrowing harder or more expensive while it is recorded on your credit files²². Having a CCJ can affect your credit rating and may make it harder for you to obtain credit in the future²³.

The effect is not only about future borrowing. A CCJ can affect your credit score, your ability to borrow, your ability to rent, and even employment opportunities²⁴. If your landlord gets a CCJ against you, it will affect your credit rating and you may have difficulty getting credit and borrowing money²⁵.

Car finance is common, so having an agreement on your file is not unusual in itself. Almost a quarter (24%) of survey respondents used hire purchase or a conditional sale agreement, 18% paid by credit card and 17% entered a personal contract purchase agreement²⁶. Among UK adults buying their home, 62% are credit users²⁷.

The practical point is that a car finance agreement is a long-term commitment that sits on your file for the whole term. Keeping up with payments builds a positive record. Falling behind damages it, and the damage lasts.

Is car finance a secured loan?

Yes. With PCP and hire purchase, the loan is secured against the car⁵. Car finance is considered a secured loan because the loan is secured against the car²⁹. With a PCP or HP agreement, the debt is secured against the car⁶.

That security cuts both ways. It is why car finance is often cheaper than an unsecured personal loan, because the lender has something to recover if you stop paying. It is also why the consequences of missing payments are more serious. HP car finance is secured against the car, so if you do not keep up with payments, you could lose the car⁵.

The rules on repossession depend on how much you have paid. The finance company can take the car back without going to court if you have paid less than a third of the agreement⁹. Once you have paid a third or more, the lender generally needs a court order. You cannot sell the car without the lender's written permission, as you do not own the car until you have paid off the agreement¹⁴.

If you are struggling, help is available. If you have a hire purchase or conditional sale agreement, you can usually maintain the repayments in a debt management plan and continue to use the vehicle, but check the agreement as it could contain a clause allowing the creditor to terminate if you enter a plan³⁰. Free, impartial advice is available from MoneyHelper and from debt advice charities such as StepChange and National Debtline.

How much deposit do I need for car finance?

A deposit of around 10% of the car's value is typical. Under a hire purchase agreement for a car, you usually pay an initial deposit, normally at least 10% of the car's price⁷. PCP usually works the same way, with a deposit of around 10% of the car's value⁶.

You need the cash to put down as a deposit, or a car to trade in²⁹. A trade-in can serve as your deposit, which is how many buyers avoid finding cash up front.

The size of your deposit changes your monthly payments. A larger deposit reduces the amount you are financing, which lowers the monthly figure on both PCP and HP. On PCP it also reduces the amount of depreciation you are financing, which is the main driver of the monthly cost.

If you have no deposit at all, some deals are structured to work without one, but you will pay more each month and likely more in total. There is a separate question of whether a deposit is required at all, and the answer depends on the lender and the deal.

What happens if I go over the PCP mileage limit?

PCP contracts include an annual mileage limit that you agree at the start. If you exceed the agreed mileage limit you will need to pay excess mileage charges¹⁰. The lower the limit you agree, the lower your monthly payments tend to be, which is why some buyers are tempted to set it low and then exceed it.

The charge bites when you return the car. Charges may apply if you go over the agreed mileage limit and want to return the car³¹. You will also have to pay for any excess mileage or damage³².

Hire purchase has no mileage limits, so you do not have to be conscious of mileage limits as you do with PCP³. Mileage still matters on HP, because putting miles on the clock affects the car's future value, but there is no contractual penalty³³.

If you are choosing between the two and you do a lot of miles, this is one of the clearest differences. A PCP mileage limit that looks generous at the start can become expensive if your circumstances change and you start driving more.

Can I sell a car that is still on finance?

Generally, no. For finance options like PCP or HP, you will not have complete ownership of the car until all payments are finalised, so a private sale is not legally permissible³⁴. You cannot sell the car without the permission of the finance company, and this also applies to lease or hire agreements⁹. You cannot sell the car until you have made all the payments⁹.

If you want to sell, you have two routes. You can settle the finance first, which means paying off the outstanding balance and any settlement figure, and then sell the car as the owner. Or you can seek the lender's permission before agreeing to a private sale, perhaps because you feel you will get more for the car than your lender would offer³⁴.

With a PCP or HP car finance deal you cannot sell your car during the term of the deal¹¹. If you have a car on a hire purchase or conditional sale agreement, you do not own the item until you make the final payment and complete the agreement, so you need your lender's permission to sell before finishing the agreement³⁵.

There is a practical warning here for buyers too. If you are buying a used car privately, it is worth checking whether there is outstanding finance on it, because a car with finance still attached can be repossessed from you even after you have paid for it.

Where to get help if car finance goes wrong

If something goes wrong with the car or the agreement, the first step depends on what the problem is.

If the car is faulty, and you bought it on hire purchase, the finance provider rather than the dealer is legally responsible to you if there are problems with the car¹⁷. That gives you a stronger position than a cash buyer, because you can pursue the finance company.

If you want to complain about the finance itself, you need to write to the finance company, not the seller, for purchases financed by hire purchase or conditional sale³⁶. If you bought your car with a finance package like a PCP or HP, or a lease, technically your car belongs to the finance company and it should be able to help you through the process¹⁵.

If you cancel within the cooling-off period, the dealer will have to refund the finance company rather than you directly. The finance company will then have to terminate your agreement and pay you back your deposit plus any payments you have already made, minus any deductions made for fair usage³⁷.

If you cannot resolve a complaint with the finance company, you can take it to the Financial Ombudsman Service, which is free. Free, impartial help with debt is available from MoneyHelper, StepChange and National Debtline.