Understanding Car Finance: PCP vs HP vs Lease - Which is Best?

Over 90% of new cars in the UK are bought on finance, but choosing the wrong type can cost you thousands. This comprehensive guide explains PCP, HP, and leasing to help you make the right decision.

Personal Contract Purchase (PCP)

How PCP Works

Structure:

1. Pay deposit (typically 10%)
2. Monthly payments for 2-4 years
3. Final balloon payment or return car

Example:

• Car value: £25,000
• Deposit: £2,500 (10%)
• Term: 36 months
• Balloon payment: £10,000
• Monthly payment: £280

PCP Advantages

✓ Lower Monthly Payments

• 20-30% cheaper than HP
• More affordable premium cars
• Better cash flow

✓ Flexibility

• Return car at end
• Buy car with balloon payment
• Part-exchange for new car

✓ New Car Every Few Years

• Always drive latest models
• Warranty coverage
• No depreciation risk

✓ Fixed Future Value

• Guaranteed minimum value
• Protected from market changes
• No negative equity risk

PCP Disadvantages

✗ Mileage Restrictions

• Typical limit: 10,000 miles/year
• Excess charges: 5-20p per mile
• Expensive if exceeded

✗ Condition Requirements

• Fair wear and tear only
• Damage charges apply
• Professional inspection

✗ Never Own the Car

• Unless you pay balloon
• Continuous payments
• No equity building

✗ Total Cost Higher

• More interest paid
• Balloon payment required
• Expensive long-term

Best For:

• Low monthly payment priority
• Regular car changes
• Low annual mileage
• Business users
• New car preference

Hire Purchase (HP)

How HP Works

Structure:

1. Pay deposit (typically 10%)
2. Fixed monthly payments
3. Own car at end

Example:

• Car value: £25,000
• Deposit: £2,500 (10%)
• Term: 48 months
• Monthly payment: £420
• Final payment: £0

HP Advantages

✓ Own the Car

• Yours at end of term
• Build equity
• No mileage limits
• No condition restrictions

✓ Simple and Clear

• Straightforward structure
• Fixed payments
• No surprises
• Easy to understand

✓ No Balloon Payment

• Smaller final payment
• No refinancing needed
• Clear end date

✓ Flexible Terms

• 12-60 months available
• Adjust to budget
• Early settlement possible

HP Disadvantages

✗ Higher Monthly Payments

• 20-30% more than PCP
• Limits car choice
• Tighter budget

✗ Depreciation Risk

• You bear the loss
• Negative equity possible
• Market dependent

✗ Longer Commitment

• Typically 4-5 years
• Harder to change
• Early exit expensive

✗ Not Yours Until Paid

• Can't sell without permission
• Lender owns until final payment
• Restrictions apply

Best For:

• Want to own the car
• High annual mileage
• Keep cars long-term
• Build equity
• No mileage restrictions needed

Personal Contract Hire (Leasing)

How Leasing Works

Structure:

1. Pay initial rental (3-12 months)
2. Fixed monthly payments
3. Return car at end

Example:

• Car value: £25,000
• Initial rental: £900 (3 months)
• Term: 36 months
• Monthly payment: £250
• Final payment: £0

Leasing Advantages

✓ Lowest Monthly Payments

• Cheapest option
• Access premium cars
• Better cash flow

✓ No Depreciation Worry

• Not your problem
• Fixed costs
• Predictable budgeting

✓ Includes Maintenance

• Optional packages
• Servicing included
• Tyres covered
• MOT included

✓ Business Tax Benefits

• 100% tax deductible
• VAT reclaimable (50%)
• Reduces corporation tax

Leasing Disadvantages

✗ Never Own the Car

• No equity
• Continuous payments
• Nothing at end

✗ Strict Mileage Limits

• Expensive excess charges
• Difficult to predict
• No flexibility

✗ Condition Requirements

• Strict standards
• Damage charges
• Professional inspection

✗ Early Exit Expensive

• Typically all remaining payments
• Very costly
• Limited options

Best For:

• Business users
• Tax efficiency priority
• Lowest payment needed
• Regular car changes
• Maintenance included wanted

Cost Comparison (£25,000 car, 36 months)

PCP

| Item | Cost | |------|------| | Deposit | £2,500 | | Monthly (36 months) | £10,080 | | Balloon payment | £10,000 | | Total to own | £22,580 | | Total to return | £12,580 |

HP

| Item | Cost | |------|------| | Deposit | £2,500 | | Monthly (36 months) | £15,120 | | Final payment | £0 | | Total to own | £17,620 |

Lease

| Item | Cost | |------|------| | Initial rental | £900 | | Monthly (36 months) | £9,000 | | Final payment | £0 | | Total cost | £9,900 | | Own at end? | No |

Which Option is Cheapest?

To Own the Car:

1. HP: £17,620 (cheapest to own)
2. PCP: £22,580 (if buying with balloon)
3. Lease: Not possible

To Use for 3 Years:

1. Lease: £9,900 (cheapest)
2. PCP: £12,580 (return car)
3. HP: £17,620 (but you own it)

Decision Framework

Choose PCP If:

✓ Want low monthly payments ✓ Change cars every 3-4 years ✓ Low annual mileage (under 10,000) ✓ Want flexibility at end ✓ Don't want depreciation risk

Choose HP If:

✓ Want to own the car ✓ High annual mileage ✓ Keep cars 5+ years ✓ Want to build equity ✓ No mileage restrictions

Choose Leasing If:

✓ Business user (tax benefits) ✓ Want lowest payments ✓ Change cars frequently ✓ Want maintenance included ✓ Don't want to own

Hidden Costs to Consider

PCP Hidden Costs

• Excess mileage charges
• Damage charges
• Early termination fees
• Balloon payment interest

HP Hidden Costs

• Early settlement fees
• Higher interest rates
• Depreciation loss
• Maintenance costs

Lease Hidden Costs

• Excess mileage (most expensive)
• Damage charges (strict)
• Early termination (very expensive)
• Processing fees

Tips for Getting the Best Deal

1. Negotiate Everything

• Purchase price
• Deposit amount
• Interest rate (APR)
• Balloon payment (PCP)
• Mileage allowance

2. Shop Around

• Compare multiple lenders
• Check manufacturer offers
• Consider brokers
• Look at online deals

3. Understand the Terms

• Read all small print
• Check mileage limits
• Understand penalties
• Know your rights

4. Consider Total Cost

• Not just monthly payment
• Include all fees
• Factor in balloon payment
• Calculate cost per mile

5. Check Your Credit Score

• Better score = better rate
• Check before applying
• Correct any errors
• Improve if possible

Conclusion

Best Overall Value: Hire Purchase (if keeping car) Lowest Monthly Payment: Leasing Most Flexible: PCP Best for Business: Leasing Best for High Mileage: HP

Key Takeaway: Choose based on your priorities:

• Ownership: HP
• Low payments: Lease or PCP
• Flexibility: PCP
• Tax efficiency: Lease

Always calculate the total cost, not just the monthly payment, and read all terms carefully before signing.