Work out the monthly payment on a car finance deal, PCP or hire purchase, and see what the car really costs once interest is added. Compare terms, deposits and final payments before you sign anything at the dealership.
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PCP or HP: what’s the difference?
- Hire purchase (HP): you pay off the whole price, minus your deposit, in equal monthly payments. You own the car after the last one.
- Personal contract purchase (PCP): part of the price is deferred to a final “balloon” payment, usually the dealer’s guaranteed minimum future value (GMFV). Monthly payments are lower, and at the end you can pay the balloon to keep the car, hand it back, or part-exchange it.
Because you’re paying interest on the balloon throughout a PCP deal, it usually costs more in total than HP for the same car, even though the monthly figure looks smaller.
Worked example: the same £25,000 car
With a £3,000 deposit, 8.9% APR over 48 months:
| PCP (£9,000 balloon) | HP | |
|---|---|---|
| Monthly payment | £384.95 | £542.85 |
| Total payable if you keep the car | £30,477 | £29,057 |
| Cost of credit | £5,477 | £4,057 |
PCP saves about £158 a month, but if you pay the balloon to keep the car it costs about £1,420 more overall. If you hand the car back instead, you’ll have spent £21,478 (deposit plus payments) to drive it for four years.
Before you sign
- Compare the total amount payable, not just the monthly payment.
- Check the annual mileage limit on PCP and the charge per extra mile.
- Ask whether there’s a commission arrangement. Lenders and brokers must tell you about it.
- A bigger deposit or shorter term cuts the interest you pay.
Frequently asked questions
Is PCP or HP cheaper?
HP is usually cheaper overall if you want to keep the car, because you aren’t paying interest on a large deferred balloon. PCP has lower monthly payments and suits people who change cars every few years.
What is a balloon payment?
The optional final payment on a PCP deal. Pay it and you own the car; don’t, and you can hand the car back with nothing more to pay, as long as you’re within the mileage and condition terms.
Does a bigger deposit lower the payments?
Yes. Every pound of deposit is a pound you don’t borrow, so both the monthly payment and the total interest fall.
Is the APR the same as the interest rate?
Not quite. APR includes compulsory fees and shows the yearly cost of the loan, so it’s the best figure to compare deals with.
Sources
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