On a £25,000 car with a £2,500 deposit over four years at 9.9% APR, a personal contract purchase costs £399 a month against £570 on hire purchase. The difference is the £10,000 balloon payment the PCP defers to the end: pay it and own the car, and the PCP has cost £31,649 against £29,840 on HP, £1,809 more in interest for the lower monthly outlay. Hand the car back instead and you have paid £21,649 for four years’ use. Which is better depends on whether you intend to keep the car, how far you drive, and what the same money would cost as a bank loan.
The three routes on the same car
| £25,000 car, £2,500 deposit, 48 months, 9.9% APR | Monthly | Total paid to own the car | Cost of credit |
|---|---|---|---|
| PCP with a £10,000 guaranteed future value | £399, then £10,000 balloon | £31,649 | £6,649 |
| Hire purchase | £570 | £29,840 | £4,840 |
| PCP, car handed back at the end | £399 | £21,649 for four years’ use, no car |
Under hire purchase the whole price less the deposit is repaid over the term and the car is yours after a small option-to-purchase fee. Under PCP only the difference between the price and the guaranteed future value is repaid monthly, while interest runs on the full balance including the deferred sum, which is why the total is higher despite the lower payment. The PCP versus HP calculator compares both, and a cash purchase, for any price, deposit, term, rate and balloon.
How the numbers move with the car
| Car | Deposit | Term and APR | Balloon | PCP monthly | HP monthly | Extra cost of PCP if the balloon is paid |
|---|---|---|---|---|---|---|
| £15,000 | £1,500 | 36 months, 11.9% | £6,000 | £308 | £448 | £978 |
| £25,000 | £2,500 | 48 months, 9.9% | £10,000 | £399 | £570 | £1,809 |
| £40,000 | £4,000 | 48 months, 7.9% | £18,000 | £557 | £877 | £2,636 |
The bigger the balloon relative to the price, the lower the payment and the larger the interest penalty for eventually buying the car. Dealers set the guaranteed future value conservatively, so at the end of a PCP the car is often worth more than the balloon; that equity can be used as the deposit on the next car, which is the cycle PCP is designed to create. A car worth less than the balloon can simply be handed back, which is the guarantee.
What a personal loan costs instead
| Borrow £18,000 for a £20,000 car at 9.9% | Monthly | Total interest |
|---|---|---|
| Over 48 months | £456 | £3,872 |
| Over 60 months | £382 | £4,894 |
A personal loan makes you a cash buyer: you own the car from day one, can sell it whenever you like, and face no mileage limits or condition charges. Rates on unsecured loans for good credit records are frequently lower than dealer APRs, although dealers sometimes subsidise finance on new cars to below any bank rate, in which case the finance is the discount. The car finance calculator prices a loan for any amount, rate and term, and the loan repayment calculator compares two offers side by side.
Depreciation is the real cost
A £30,000 new car losing 20% of its value a year is worth £24,000 after one year, £19,200 after two and about £9,800 after five, so depreciation of roughly £20,000 over five years dwarfs the £5,000 to £7,000 of interest on any of the finance routes above. PCP payments are essentially a depreciation charge plus interest: the monthly figure is close to the car’s expected loss of value spread over the term. Buying a two or three-year-old car with hire purchase or a loan avoids the steepest part of the curve. The car depreciation calculator shows the schedule for any price and rate, and the cost of ownership calculator adds tax, insurance, fuel and servicing; our car tax guide covers the £200 standard rate and the £440 supplement on cars over £40,000.
The PCP small print
PCP agreements carry an annual mileage allowance, and excess mileage is charged per mile at the end where the car is handed back, alongside charges for damage beyond fair wear and tear. Both HP and PCP agreements can be ended early by voluntary termination once half the total amount payable has been paid, returning the car with nothing more to pay provided it is in good condition and within mileage. Settling early is also possible at any time, with a rebate of interest under the Consumer Credit Act. Anyone with a car finance agreement taken out before 28 January 2021 should check whether commission paid to the dealer was disclosed, as a compensation scheme for undisclosed commission is being run by the Financial Conduct Authority.
Common questions
What is the difference between PCP and HP? Hire purchase repays the whole price over the term and you own the car at the end. PCP repays only the expected depreciation, leaving a balloon payment you can pay, refinance or avoid by handing the car back.
Why is PCP cheaper per month? Because a large part of the price, the guaranteed future value, is not repaid until the end. Interest still runs on it, so the total cost is higher if you keep the car.
What is a balloon payment? The lump sum, also called the guaranteed future value, due at the end of a PCP to take ownership: £10,000 on the £25,000 example above.
Is a bank loan cheaper than dealer finance? Often, for buyers with good credit records, and it brings ownership from day one. Subsidised manufacturer rates on new cars can be the exception.
Can I end a car finance agreement early? Yes. Voluntary termination is available once half the total amount payable has been paid, and early settlement with an interest rebate is available at any time.
What happens if I go over the mileage on a PCP? Excess mileage charges apply per mile if the car is handed back. They do not apply if you pay the balloon and keep the car.
Information, not financial advice. Monthly figures are from the site’s calculator using representative APRs and a simple amortisation model; dealer quotes include fees and may use different methods. Compare the total amount payable on any written quotation before signing.