Compare HP and PCP finance options side by side with monthly payments and total costs
Choosing between HP (Hire Purchase) and PCP (Personal Contract Purchase) is one of the most important financial decisions UK car buyers face. Both are regulated finance agreements offered through dealerships and lenders, but they work in fundamentally different ways and suit different circumstances. Understanding the true cost of each option requires looking beyond the monthly payment headline figure. HP is the straightforward approach: you borrow the difference between the vehicle price and your deposit, then repay it in equal monthly instalments over the agreed term. At the end, the car is yours outright with no further payments. Your monthly payments are higher than PCP because you are paying off the entire balance, but you build equity with every payment and own a depreciating asset that you can sell whenever you choose. PCP is the most popular form of new car finance in the UK, accounting for around 80% of dealership finance agreements. Monthly payments are lower because a significant portion of the cost -- the balloon payment or Guaranteed Minimum Future Value (GMFV) -- is deferred to the end. This balloon represents the car's predicted residual value. At the end of the term, you have three choices: pay the balloon to own the car, hand it back with nothing more to pay (subject to mileage and condition limits), or use any equity as a deposit on a new PCP deal. This calculator compares both options side by side so you can make an informed decision based on your budget, how long you plan to keep the car, and whether ownership matters to you.
To compare HP and PCP car finance options: 1. Enter the vehicle price. This is the on-the-road price including VAT, delivery charges, and any factory-fitted options. You can find this on the manufacturer's website, dealer listing, or Auto Trader. 2. Enter your deposit. A larger deposit reduces your monthly payments and total interest paid under both HP and PCP. Most deals require a minimum 10% deposit, though some manufacturers offer low-deposit promotions. 3. Set the APR (Annual Percentage Rate). This is the interest rate charged on your finance. Check the dealer's website for representative APRs, or ask for a personalised quote based on your credit score. Typical UK car finance APRs range from 4% to 12%. 4. Choose the term length. Most car finance agreements run for 24, 36, 48, or 60 months. Longer terms reduce monthly payments but increase total interest paid. PCP deals are most commonly 36 or 48 months. 5. Set the balloon payment percentage for the PCP comparison. This is typically set by the finance company at 25-40% of the vehicle price, based on predicted depreciation. A higher balloon means lower monthly PCP payments but a bigger lump sum if you want to keep the car. 6. Compare the results side by side. The calculator shows HP monthly payment, HP total cost, PCP monthly payment, PCP total cost if keeping the car (including balloon), PCP total cost if returning the car, and the monthly saving of PCP over HP. 7. Consider whether you want to own the car at the end. If yes, compare HP total against PCP total keeping. If you plan to hand back and get a new car every few years, PCP returning may be cheapest.
Both HP and PCP use the standard annuity formula for calculating monthly payments, but PCP modifies it to account for the deferred balloon payment. **HP (Hire Purchase) calculation:** The amount financed is the vehicle price minus your deposit. Monthly payments use the standard loan amortisation formula: Monthly payment = r x F / (1 - (1+r)^(-n)) Where r = monthly interest rate (APR divided by 12 divided by 100), F = amount financed (vehicle price minus deposit), and n = number of monthly payments. Total HP cost = (monthly payment x n) + deposit. Total interest = total cost minus vehicle price. For example, a GBP 25,000 car with GBP 5,000 deposit at 7.9% APR over 48 months: F = GBP 20,000, r = 0.006583, n = 48. Monthly payment = 0.006583 x 20000 / (1 - 1.006583^(-48)) = approximately GBP 487. Total cost = (487 x 48) + 5000 = approximately GBP 28,376. **PCP (Personal Contract Purchase) calculation:** PCP reduces the amount being amortised by subtracting the present value of the balloon payment. The balloon is the vehicle price multiplied by the balloon percentage. Monthly payment = r x (F - B/(1+r)^n) / (1 - (1+r)^(-n)) Where B = balloon payment (vehicle price x balloon percentage / 100). The term B/(1+r)^n represents the present value of the balloon, which is subtracted from the financed amount because that portion is deferred. Total PCP cost if keeping = (monthly payment x n) + deposit + balloon. Total PCP cost if returning = (monthly payment x n) + deposit. Total interest if keeping = total cost keeping minus vehicle price. Using the same example with a 30% balloon: B = GBP 7,500. Present value of balloon = 7500 / 1.006583^48 = approximately GBP 5,465. Effective financed amount = 20000 - 5465 = GBP 14,535. Monthly payment = approximately GBP 354. The monthly saving versus HP is about GBP 133, but the total cost if keeping is higher due to interest accruing on the deferred balloon. **Key insight:** PCP always results in lower monthly payments than HP for the same car, deposit, APR, and term. However, if you pay the balloon at the end, PCP total cost is typically higher than HP because interest effectively accrues on a larger balance for longer. The PCP advantage is flexibility -- you only pay the balloon if the car is worth keeping.