Household Bills
Car Finance in the UK: Types, True Costs and What to Check
Most new cars in the UK are sold on PCP or HP. On a PCP, the lower monthly payment is offset by a large balloon payment at the end if you want to keep the car. Compare the total of all payments plus the balloon against HP before deciding.
- PCP: lower monthly, but a balloon payment to keep the car
- HP: you own the car after the last payment
- Personal loan: you own it immediately
Wisemium's Credit Readiness section gives preparation guidance for car finance applicants. Track your car insurance renewal date alongside your finance.
Car finance
- Type
- HP or PCP
- Balloon payment
- PCP only
- Ownership
- After final payment
Example. Your own details appear once you add them.
HP and PCP compared
Hire Purchase (HP)
- Monthly payments
- Higher: cover the full vehicle value
- End of term
- You own the car outright
- Early end
- Voluntary termination once half the total is paid
Personal Contract Purchase (PCP)
- Monthly payments
- Lower: do not cover the full value
- End of term
- Pay the balloon, hand the car back, or use any equity as a deposit
- Mileage
- Excess mileage charges apply if you exceed the agreed annual limit
General information. The total repayable is stated in the finance agreement before you sign.
The full guide
Most new cars sold in the UK are bought on some form of finance rather than outright purchase. The three main types — Hire Purchase (HP), Personal Contract Purchase (PCP) and personal loans — all involve borrowing to pay for the car, but the structure of the agreement and what you owe at the end are different.
The three main types
| Type | How it works | Who owns the car? |
|---|---|---|
| HP (Hire Purchase) | Fixed monthly payments over the term. You own the car outright when the final payment is made. | The finance company, until the last payment. |
| PCP (Personal Contract Purchase) | Lower monthly payments, but a large 'balloon' payment at the end if you want to keep the car. Alternatively, hand the car back. | The finance company throughout; yours only if you pay the balloon. |
| Personal loan | You borrow the purchase price and repay the lender. You own the car immediately. | You, from the start. |
PCP: the balloon payment
A PCP agreement sets a Guaranteed Minimum Future Value (GMFV) for the car at the end of the term. This is the balloon payment. If you want to keep the car, you pay it. If you do not want to pay it, you hand the car back — provided it is within the agreed mileage and in reasonable condition. If the car is worth more than the GMFV, you can use the difference (equity) as a deposit on a new PCP. The monthly payments on a PCP are lower than HP because they do not cover the full value of the car, but the total cost over the whole term is usually similar or higher.
The real cost: including everything
The sticker price is only the starting point. Before comparing finance deals, work out the total amount you will pay:
- The deposit (your cash in).
- The total of all monthly payments.
- The balloon payment, if you plan to keep the car on a PCP.
- Any arrangement fee.
That total, minus the car's price, is the cost of the finance. Compare the APR (Annual Percentage Rate) to compare the interest cost between deals on the same basis.
Running costs beyond the monthly payment
The monthly finance payment is not the only cost. Budget for insurance (which can be significant in the first year, particularly for new drivers — see What affects the cost of car insurance), road tax, fuel or electricity costs, servicing and tyres. On a PCP, excess mileage charges apply if you drive more than the agreed annual mileage.
A credit check is always required
HP and PCP are regulated credit agreements. A hard credit check is run when you apply. A limited or poor UK credit history can result in a higher interest rate or a declined application. If you are building your UK credit history, see Building a UK credit history from scratch and How to get credit-ready before you apply.
Voluntary termination
On a regulated HP or PCP agreement, you have the legal right to end the agreement early once you have paid at least half the total amount payable. This is called voluntary termination. You return the car in reasonable condition. Any amounts you have already paid are not refunded, and if you have paid more than half, there is no refund of the excess either. The right is set by the Consumer Credit Act 1974.
Wisemium's Credit Readiness check gives goal-specific preparation steps for car finance applicants.
Common questions
Can I pay off car finance early?
Yes. You can settle HP and PCP agreements early. An early settlement figure is usually calculated by the lender and includes a reduction in future interest. Ask for a settlement figure in writing.
Is PCP cheaper than HP?
PCP monthly payments are lower, but if you plan to keep the car, the total cost including the balloon payment is usually comparable to or higher than HP. Compare the total amount payable, not just the monthly payment.
Who owns the car during a PCP or HP agreement?
The finance company. You are essentially hiring the car until it is paid off. This means you cannot sell it without settling the finance first.
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