If you’re financing a used car in the UK, you’ll almost always be choosing between two agreements: Hire Purchase (HP) and Personal Contract Purchase (PCP). They can look similar on a finance calculator, but they work very differently - especially when it comes to what you own, what your monthly payment actually covers, and what happens if you want to sell the car before the agreement ends.
This guide explains the real difference between PCP and HP, compares typical costs, and covers what happens to the finance if you sell partway through.
What Is Hire Purchase (HP)?
With Hire Purchase, you pay a deposit followed by fixed monthly instalments that, between them, cover the full remaining price of the car plus interest. Once you’ve made the final payment, ownership transfers to you automatically - there’s no separate lump sum at the end.
Because every monthly payment is contributing towards the full price of the car, HP payments are typically higher than PCP for the same vehicle, deposit and term. In return, you build equity in the car faster and there’s no large final payment to plan for.
What Is Personal Contract Purchase (PCP)?
With PCP, your monthly payments only cover the car’s expected depreciation over the agreement, not its full value. The rest is deferred into a lump sum at the end - the Guaranteed Minimum Future Value (GMFV), commonly called the balloon payment.
At the end of a PCP agreement (typically 2-4 years), you have three options:
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Hand the car back and walk away, provided it’s within the agreed mileage and condition limits
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Pay the balloon payment and keep the car
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Part-exchange it towards a new agreement, using any equity above the balloon payment as a deposit
Because you’re only financing the depreciation, not the full price, PCP monthly payments are almost always lower than HP on the same car - but you don’t automatically own the car at the end.
Key Differences Between PCP And HP
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Monthly payments: PCP is typically lower, since it only finances depreciation. HP is higher, since every payment builds towards full ownership.
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Ownership at the end: HP transfers ownership automatically once the final payment is made. PCP requires you to pay the balloon payment separately if you want to keep the car.
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Mileage limits: PCP agreements set an annual mileage cap (commonly 8,000-10,000 miles), with charges for exceeding it. HP has no mileage restriction, since you’re buying the car outright.
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Total cost: If you intend to keep the car long-term and pay off the balloon, PCP can end up more expensive overall than HP, because of the interest charged on the deferred balloon amount.
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Flexibility: PCP suits drivers who prefer to change cars every few years. HP suits drivers who want to own the car outright with no balloon decision to make later.
What Happens To PCP Or HP Finance If You Sell The Car?
You can sell a car that’s still on finance, but only after the outstanding finance is settled - the finance company legally owns the car (or has a charge over it) until the agreement is paid off, and selling it without settling first is a serious problem for both you and the buyer.
To sell, you’ll need a settlement figure from your finance provider - this covers the remaining balance plus any interest and early settlement fees. If the car is worth more than the settlement figure, you keep the difference. If it’s worth less, you’ll need to cover the shortfall yourself before the sale can go through.
The Balloon Payment Makes PCP Settlement Different
This is where PCP and HP genuinely diverge when selling early. On an HP agreement, the settlement figure is simply what’s left of the remaining instalments. On a PCP agreement, settling early means paying off the deferred balloon payment as well, which is often a large sum - so a PCP settlement figure partway through the agreement can be significantly higher relative to the car’s current value than an equivalent HP settlement.
If your settlement figure is higher than the car’s current market value, you’re in negative equity - you’ll need to pay the difference out of pocket to clear the finance before selling, or before trading in towards another car.
If you can no longer afford the payments, voluntary termination lets you hand the car back early - but only once you’ve paid at least 50% of the total amount payable under the agreement (on PCP, this includes the balloon payment in that 50% total, not just the monthly instalments).
Why This Matters When Buying A Used Car
If you’re buying a used car privately, checking for outstanding finance protects you specifically from this: a car still has finance owing on it if the seller hasn’t gone through the settlement process above, and if you unknowingly buy a car with outstanding finance, the finance company can legally repossess it from you, even though you paid the seller in good faith. Always run an outstanding finance check using the registration number before handing over any money.
Frequently Asked Questions
Is PCP Or HP Cheaper Overall?
It depends on what you do at the end. PCP has lower monthly payments throughout, but if you pay the balloon payment to keep the car, the total cost (monthly payments plus balloon plus interest) can end up higher than HP over the same term. HP has higher monthly payments but no balloon payment to plan for.
Can I Sell A Car On PCP Before The Agreement Ends?
Yes, but you must settle the finance first, which on PCP includes the deferred balloon payment. Get a settlement figure from your finance provider before agreeing a sale price with a buyer.
What’s The Difference Between PCP And Leasing?
With PCP, you have the option to buy the car at the end by paying the balloon payment. With a lease (PCH), you never own the car - you simply hand it back at the end, with no ownership option at all.
How Do I Check If A Used Car Still Has Finance Owing?
Run a vehicle history check using the registration number. This checks the registration against finance company records and flags any outstanding finance agreement still registered against that vehicle, protecting you from buying a car that could later be repossessed.
HP and PCP solve different problems: HP is the more straightforward route to outright ownership, while PCP trades lower monthly payments now for a bigger decision - and a bigger payment - later. Neither is universally better; it depends on whether you plan to keep the car long-term, how many miles you drive, and how you’d rather structure the cost. Whichever you’re buying, always check for outstanding finance before paying for a used car - it’s the one risk that follows the vehicle, not the seller.