Car finance: PCP, HP and PCH pros and cons

There are a number of ways you can take out car finance – find the type that suits you with our guide to vehicle finance pros and cons

Matt Rigby
Jan 20, 2022
Ford Fiesta ST front three quarters view

Car finance has become by far the most popular way to pay for a new car. It's preferred by drivers all over the UK thanks to its affordability compared a standard cash purchase, and it's available with both new and used cars.

If you think you'd be better off being able to spread the cost of your next car across a few years worth of monthly payments, you can take your pick of the many types of car finance available to you. There are a few complex-sounding terms to get your head around, but finding a great deal needn't be too difficult.Β 

The type of finance you decide to go for will depend on your personal circumstances and how you use your car. The key here is to work out what’s important to you. Are you looking for the lowest overall cost? Are lower monthly payments the most important part? How many miles do you expect to drive every year? Do you want to be the owner of the car you drive, or are you less bothered about technical ownership and just want personal use of a car at an affordable rate?

All these factors should be taken into account when you're looking at how to pay for your next car.

Personal Contract Purchase (PCP)

One of the most popular ways to pay for a car is PCP finance (Personal Contract Purchase). The reason for this is that PCP provides low monthly payments and you have the choice to either hand the car back at the end of the contract or to buy it for a pre-agreed amount - known as the optional final payment.

PCP monthly payments only cover part of the car’s cost - the difference between its price at the start of the contract and what it's expected to be worth at the end. This makes monthly payments cheaper than with a traditional car loan and or Hire Purchase (HP), which is covered below.

Contracts typically last between two and five years. At the end, you can hand the car back with nothing more to pay - provided you've stuck to the pre-agreed mileage limit and there's no damage beyond fair wear and tear - or you can make the large optional final payment to buy the car outright.

Hire Purchase (HP) and Conditional Sale (CS)

HP (Hire Purchase, and almost interchangeable with Conditional Sale) makes sense for those who know they want to own a car - as you'll end up paying less in interest overall than with an equivalent PCP deal (assuming the same deposit and contract length). The cost of the car is spread over a series of fixed monthly instalments, usually across two to five years. As soon as you've made the last monthly payment, the car is yours.

Hire Purchase agreements cost you more per month than a PCP deal (again assuming the same contract length and deposit) as there's no large payment at the end. However, as you're paying off the balance faster than with PCP, you'll be charged less in interest overall. Plus, you don't need to find enough cash to cover the large lump sum at the end, which could amount to Β£10,000 or more - or refinance this - as you would with PCP.

Leasing a car

Another way of paying for a car on a monthly basis is Personal Contract Hire (PCH) - also known as car leasing - which is increasing in popularity. This doesn't strictly count as car finance, as it's effectively like long-term car rental - as you have to hand the car back when the contract ends - though if you're after a new car for a low monthly payment and know you don't want to own it, it could suit your needs.

PCH leasing is similar to PCP, though you have no option to buy the car at the end of the contract and you have fewer consumer rights if you need to end the contract early. It's also much more difficult to find an affordable car lease deal if you have a bad credit score.

Look at the table below for the a quick overview of the pros and cons for each type of finance and click to visit our detailed guide to buying a car on finance for all the info on the ins and outs of car finance.

Car finance pros and cons

Monthly payments

Monthly payments

No-deposit option

Do you own car at end of contract?

Excess mileage charges?

Damage charges

PCP

Lower

βœ”

Optional

βœ” *

βœ” *

HP

Higher

βœ”

βœ”

✘

✘

PCH

Lower

✘

✘

βœ”

βœ”

*Where handing car back at end of contract

Β 

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