Types of Car Finance: PCP, HP, Leasing & Loans

The four types of car finance, at a glance

PCP, HP, leasing and a personal loan are the four ways to finance a car. The fastest way to choose is to decide whether you want to own the car at the end.

Two questions sort most people: do you want to own the car, and do you drive predictable, low-to-mid mileage? If the answer to both is yes, HP or a loan usually wins. If you want a low monthly and a new car every few years, PCP leads. If you never want to own and like a fixed all-in cost, leasing fits.

PCP (Personal Contract Purchase)

PCP is car finance where your monthly payments cover the car's expected drop in value, not its full price. At the end you choose to pay a balloon and keep it, hand it back, or part-exchange.

Because you only finance the depreciation — the difference between the car's price today and its predicted value at the end — the monthly payment is the lowest of the four. That predicted end value is the Guaranteed Minimum Future Value (GMFV), sometimes called the GFV, and it sets the balloon.

You don't own the car unless you pay that final balloon, which you can fund from savings, a new loan, or by rolling it into another PCP. Agree a low annual mileage up front (typically 8,000–12,000) because the GMFV assumes it; drive more and you pay an excess-mileage charge. PCP suits drivers who like a low monthly and a new car every few years. Work out a PCP deal on the PCP calculator.

• Lowest monthly of the four types, because you finance depreciation not the full price.
• Three end options: pay the balloon to keep it, hand it back and walk away, or part-exchange any equity.
• Mileage limit and a condition standard (BVRLA fair wear and tear) apply, with charges if you breach them.
• Ownership only passes if you pay the balloon — until then the lender is the legal owner.

HP (Hire Purchase)

HP is car finance where you pay off the whole price in equal monthly instalments, and own the car once the final payment is made. There's no balloon.

You finance the full price rather than just the depreciation, so HP costs more per month than PCP — but the car is yours outright at the end, with nothing left to decide. The final payment transfers ownership to you, usually along with a small option-to-purchase fee (often £100–£300) set out in the agreement.

HP has no mileage limit and no end-of-term condition check, because you're buying the whole car. You can also overpay or settle early and claim a statutory interest rebate under the Consumer Credit (Early Settlement) Regulations 2004. HP suits drivers who want to keep the car and keep things simple. Run the numbers on the HP calculator.

• You own the car outright once the final payment (and any option-to-purchase fee) is made.
• No mileage limit and no condition standard — the car is yours to drive as you like.
• Usually cheaper overall than PCP on the same car, because there's no balloon financing.
• Higher monthly than PCP, because you're paying off the full price over the term.

Leasing (PCH)

Leasing, or Personal Contract Hire, is long-term rental — you pay a fixed monthly amount to use the car, then hand it back. You never own it.

Lease payments cover use and depreciation only, so the monthly can be low, and servicing and road tax are sometimes bundled in for a single all-in cost. You agree an initial rental (sometimes called a deposit) and a mileage limit up front, and the car must come back inside the BVRLA fair-wear-and-tear standard.

There's no balloon because there's no option to buy — you simply return the car at the end and can start a new lease. Go over the mileage or hand back a damaged car and you pay the relevant charge. Leasing suits drivers who never want to own, want a predictable monthly, and like changing cars regularly. Estimate a lease on the leasing calculator.

Personal loan

A personal loan is money you borrow from a bank to buy the car outright, so you own it from day one. The car isn't tied to the loan.

Because you own the car immediately, there's no mileage limit, no condition standard, and you can sell whenever you like. The monthly sits between PCP and HP for most people, and a strong credit score gets the best rate — often the cheapest headline APR of the four if your file is clean.

A loan is the only type that makes you the legal owner from day one, which means full Section 75 protection if you use a credit card for part of the purchase, and no lender holding a charge over the car. The trade-off is that the lender won't repossess the car if you default — they'll chase the debt directly, which can affect your credit file and lead to court action. Compare a loan with car finance on the loan calculator.

• You own the car outright from day one — no lender charge over the vehicle.
• No mileage limit, no condition check, and you can sell or modify the car whenever you like.
• Best headline APR if your credit score is strong, often below HP rates.
• No voluntary-termination right and no end-of-term options to weigh up — it's a straight loan.

Which type is cheapest for you?

HP or a personal loan is usually cheapest overall if you keep the car; PCP and leasing keep the monthly lower but cost more to own. It comes down to whether you want ownership and how often you change cars.

On a £20,000 car at 9.9% APR, HP runs about £452 a month and £23,695 in total, while PCP with an £8,000 balloon is about £314 a month but £25,086 to own — roughly £1,400 more for the lower monthly. A personal loan at the same APR lands close to HP on monthly but you own from day one. Put your own price, deposit and term into the main calculator and compare all four side by side.