Hire Purchase vs PCP vs Loan – Which Car Finance Wins?

Car Finance
August 6th, 2025
Hire Purchase vs PCP vs Loan – Which Car Finance Wins?

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Choosing how to finance a car is just as important as picking the car itself. With so many options available, it can be hard to know what’s best for your credit score, budget, and driving habits. In the UK, the three most popular choices are Hire Purchase (HP), Personal Contract Purchase (PCP), and Personal Loans. This guide breaks down the key differences, pros, and cons of each, helping you compare car finance options effectively.

What Is Hire Purchase (HP)?

Hire Purchase is a common way to finance a new or used car. You pay an initial deposit and then make fixed monthly payments over a period of time, usually between 2 to 5 years.

Key Features of HP:

  • Fixed interest rate for the full term
  • The car is owned by the finance company until the final payment is made
  • No mileage limit
  • Higher monthly payments compared to PCP
  • No balloon payment at the end

Example HP Deal:

Car Price Initial Deposit Term APR Monthly Payment Total Cost of Borrowing
£15,000 £1,500 48 months 9.9% £344 £17,012

Once you make the final payment, ownership of the car transfers to you.

What Is PCP (Personal Contract Purchase)?

PCP finance is another type of car finance deal that allows for lower monthly payments compared to HP. You still pay an initial deposit and monthly payments, but these payments only cover part of the car’s value.

Key Features of PCP:

  • Lower monthly payments than HP
  • Large final payment (balloon payment) if you want to own the car
  • Option to return, keep, or part-exchange the car at the end of the agreement
  • Mileage limit and wear-and-tear charges apply
  • Interest charged on the full amount, including the balloon payment

Example PCP Deal:

Car Price Initial Deposit Term APR Monthly Payment Balloon Payment Total Cost
£15,000 £1,500 48 months 9.9% £230 £6,000 £18,540

If you decide to keep the car, you’ll need to pay the balloon payment at the end of the agreement.

What Is a Personal Loan?

A personal loan is money borrowed from a bank or lender to buy a car outright. This loan is usually unsecured and is based on your credit score, credit report, and affordability.

Key Features of Personal Loans:

  • You own the car from day one
  • No mileage limits or end-of-the-contract restrictions
  • May offer lower APRs for those with good credit
  • Total cost of borrowing may be lower if eligibility is strong

Example Personal Loan:

Car Price Loan Amount Term APR Monthly Payment Total Cost
£15,000 £15,000 48 months 7.5% £362 £17,376

Unlike HP or PCP, you are not tied to a dealership or finance company.

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What Are the Key Differences Between HP, PCP and Personal Loans?

Feature HP PCP Personal Loan
Ownership After final payment After balloon payment Immediate
Monthly Payments Higher Lower Depends on APR
Final Payment None Large balloon payment None
Mileage Limit No Yes No
Early Settlement Possible, fees may apply Possible, includes balloon fee Yes, often flexible
Flexibility at End Owns car Return, keep, or trade Already owned
Good Option For Long-term ownership New car every few years Total control and flexibility

Which Option Has the Lowest Monthly Payments?

PCP deals typically offer lower monthly payments than HP and personal loans. This is because you’re not paying off the full value of the car over the agreement. However, you must be prepared for the large final payment at the end if you wish to keep the vehicle.

Lower Monthly Payments – But At What Cost?

Lower monthly payments might sound appealing, but consider the overall cost of borrowing and what happens at the end of the deal. The balloon payment can be thousands of pounds.

What About Interest Rates and APR?

Interest rates (or APR – Annual Percentage Rate) vary based on your credit score, deposit, and lender. Personal loans often come with better rates if you have excellent credit. HP and PCP deals are often tied to dealership finance companies, and the rate may be slightly higher.

Credit Score Likely APR – Personal Loan Likely APR – HP/PCP
Excellent 5.5% – 7.5% 7.9% – 9.9%
Good 7.5% – 9.9% 9.9% – 13.9%
Fair or Poor 14%+ 14%+

Always compare car finance offers using APR, not just the monthly figure.

Are There Mileage or Wear-and-Tear Limits?

PCP

Yes. PCP agreements include mileage limits, typically between 8,000–12,000 miles per year. Exceeding this can result in additional charges at the end of the agreement.

HP and Personal Loan

No mileage limits. Since you are working towards full ownership, usage is unrestricted.

What Happens at the End of the Agreement?

End of PCP Agreement:

You can:

  • Pay the balloon payment and keep the car
  • Hand the car back to the finance company
  • Trade the car in for a new PCP deal

End of HP Agreement:

You pay the final regular payment, and the car is yours.

End of Personal Loan:

No further action — you already own the vehicle.

What Happens at the End of the Agreement

What Are the Pros and Cons of Each Option?

Option Pros Cons
HP Finance Simple structure, own car at end, no mileage limit Higher monthly payments, no flexibility at end
PCP Finance Lower monthly payments, more flexible at end Mileage limits, large final payment, cost of borrowing higher
Personal Loan Owns car from day one, no dealer tie-ins, usually lower APR Need good credit score, not always accepted

Which Option Is Best Based on Your Situation?

  • Want to own your car long-term: Hire Purchase or Personal Loan
  • Prefer lower monthly payments: PCP Finance (but watch the balloon payment)
  • Need flexibility and full control: Personal Loan
  • Buying a used car: HP or Personal Loan are more common than PCP
  • High mileage driver: Avoid PCP due to mileage limit

How Can Free Price Compare Help?

At Free Price Compare, we help UK drivers compare car finance options including HP deals, PCP agreements, and personal loans. We work with trusted brokers such as Zuto, MatchMe, and CarFinance 247 — each with access to a wide lender panel.

One quick application connects you to the most suitable lender based on your credit score, vehicle type, and budget. Whether you’re after a new car, refinancing your current one, or weighing up financing vs leasing, we make it easy to explore your choices.

We also help break down confusing finance terms like APR, balloon payment, lump sum, and eligibility criteria — so you can make an informed decision.

Correct as of 25 July 2025

FAQs: About HP, PCP and Personal Loans

How strict are the mileage limits on PCP deals?

Most are capped at 8,000 to 12,000 miles annually. Exceeding them triggers charges at the end of the agreement.

Which is better if I want to own the car?

HP is better — you own the car after the last payment. PCP requires a large final payment to keep it.

Is it cheaper to use a personal loan for car finance?

It can be if you have a strong credit score and secure a lower APR than the dealership.

What happens if I can’t pay the final payment on a PCP?

You can return the car to the lender — but you won’t own it and must stay within mileage and wear terms.

Can I use Free Price Compare to check all three finance types?

Yes, we help you compare car finance options across HP, PCP, and personal loans with no pressure and no obligation.

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