Car finance: PCP vs HP vs leasing
Quick answer: The three main ways to finance a new or used car in the UK are Personal Contract Purchase (PCP), Hire Purchase (HP) and Personal Contract Hire (leasing).
The three main ways to finance a new or used car in the UK are Personal Contract Purchase (PCP), Hire Purchase (HP) and Personal Contract Hire (leasing). They look similar from the showroom forecourt, but the ownership rights, monthly cost and what happens at the end are very different.
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Primary source: https://www.fca.org.uk/consumers/car-finance
Hire Purchase (HP)
You pay an initial deposit, then fixed monthly payments over (typically) 24–60 months. At the end of the term, after the final payment and a small Option to Purchase fee, the car is legally yours.
Until the final payment, the finance company is the legal owner — you cannot sell it without their consent. APRs are usually higher than the headline PCP rate because more of the car's value is being repaid each month.
Personal Contract Purchase (PCP)
PCP defers a chunk of the car's value to the end of the term as a 'Guaranteed Future Value' (GFV), also called a balloon payment or Optional Final Payment. You only finance the difference between the car's price and the GFV, so monthly payments are lower than HP.
At the end of the term you have three options: pay the GFV and keep the car; hand it back (subject to mileage and condition); or use any equity above the GFV as a deposit on another PCP deal.
Mileage limits are agreed up front — exceeding them triggers a per-mile excess charge at the end (commonly 6p–30p per mile).
Personal Contract Hire (PCH / leasing)
Leasing is rental — you never own the car. You pay an initial rental (typically 1, 3, 6 or 9 monthly payments) followed by fixed monthly rentals for 24–48 months, then hand the car back at the end.
Maintenance can be bundled in for an extra monthly cost. Excess-mileage and damage-beyond-fair-wear-and-tear charges apply at handover, using the BVRLA fair wear and tear guide.
There is no early-termination right equivalent to the HP/PCP 50% rule — early exit normally means paying most of the remaining rentals.
Your section 99 voluntary termination right
On regulated HP and PCP agreements, you have a statutory right to hand the car back once you have paid 50% of the 'total amount payable' under the agreement. On a PCP the total amount payable includes the optional final (balloon) payment, so you typically reach the 50% point later in a PCP than in an equivalent HP. If you have paid less than 50% you can still terminate by topping the payments up to 50%.
You may be liable for excess-mileage and damage charges. Voluntary termination is recorded on your credit file but is not the same as a default.
Common questions
- Which is cheapest overall?
- HP usually costs the least in total interest if you intend to keep the car beyond the finance term. PCP and PCH have lower monthlies but built-in costs at the end (the balloon or handing the car back).
- Can I sell a car still on PCP?
- Not without the finance company's permission. If the car has equity (worth more than the outstanding finance) you can settle the agreement and pocket the difference; if it has negative equity you have to make up the shortfall.
- Is leasing tax-deductible for the self-employed?
- Personal leasing is not. Business leasing (in your trading name) can allow you to reclaim some of the VAT and treat the rentals as an allowable business expense, subject to HMRC rules on private use and CO2 emissions.