PCP vs HP — see them side by side

Both are secured agreements on the same car from the same kind of lender, and both leave the lender as the legal owner until the agreement ends. The difference is entirely in how much of the car's value you repay during the term.

On hire purchase you repay the full cash price plus interest across every month of the agreement. When the final payment clears — plus a small option-to-purchase fee — the car is yours. There are no mileage limits and no condition standards to meet, because nobody is expecting the car back.

On PCP the lender estimates what the car will be worth at the end of the term and sets that figure aside as a guaranteed minimum future value, commonly called the balloon. You only repay the depreciation — the gap between the cash price and that future value — plus interest on the whole balance. That is why the monthly payment is lower. The balloon does not disappear; it waits at the end.

Look at three numbers in this order. Monthly payment tells you whether the agreement fits your budget. Total payable tells you what the finance actually costs. The balloon figure, on PCP, tells you what decision is waiting at the end and how large it is.

The monthly gap is not a saving. It is money deferred. The honest test is to ask what you expect to do in four years. If the answer is keep the car, HP is almost always the cheaper route. If the answer is change it, PCP gives you a clean exit and protects you if the used market falls, because the guaranteed future value is the lender's risk, not yours.

Hire purchase has the wider panel. It is available on older and higher-mileage cars, and lenders serving customers with adverse credit almost always work in HP rather than PCP. Because the whole balance is repaid across the term, the lender's exposure reduces steadily, which makes it a lower-risk product to underwrite.

PCP is normally reserved for newer vehicles — typically under five years old at the end of the agreement — because the lender must be confident in the guaranteed future value. Credit requirements tend to be tighter, and the vehicle rules are stricter on age and mileage.

• Bruised credit file, older car, or a car over about 80,000 miles: HP is usually the only realistic route.
• New or nearly new car, clean file, changing every few years: PCP is worth comparing properly.
• Very high annual mileage: HP avoids excess-mileage charges entirely.
• Want the lowest total cost and plan to keep the car: HP, on the shortest term you can afford.

On HP the last payment plus the option-to-purchase fee transfers ownership to you. Nothing else happens and nothing needs deciding.

On PCP you have three options. Pay the balloon and keep the car. Part-exchange, using any equity above the balloon as a deposit on your next agreement. Or hand the car back, having met the mileage limit and fair wear and tear standards, and walk away owing nothing further.