The main types of car finance
Personal Contract Purchase (PCP)
You pay a deposit and monthly payments that cover the car’s expected depreciation plus interest. At the end you can pay the optional final payment (the “balloon”, set at the Guaranteed Minimum Future Value) to own the car, hand it back, or part-exchange it. Interest is charged on the balloon too, and mileage limits and excess wear charges apply.
Hire Purchase (HP)
The cost of the car is spread over equal monthly payments. You own the car after the last payment (often plus a small option-to-purchase fee). Payments are higher than PCP, but there is no balloon or mileage limit.
Personal loan
An unsecured bank loan: you own the car from day one and can sell it at any time. Rates depend heavily on your credit score.
Personal Contract Hire (leasing)
You rent the car for a fixed term and hand it back. It is not a loan, and you never own the car.
Key points about PCP and HP
- The finance company owns the car until you have paid in full. You can’t sell it without settling the finance first.
- Voluntary termination. Under the Consumer Credit Act, once you have paid half of the total amount payable (and taken reasonable care of the car), you can hand it back and walk away with nothing more to pay.
- Insurance. Third-party insurance is a legal requirement; finance companies usually require comprehensive cover. GAP insurance is optional and is often cheaper from a standalone provider than from the dealer.
- Dealer commission. Dealers earn commission from lenders. Since 2021 commission that lets the dealer set your rate has been banned, and the dealer must tell you about commission.
Motor finance commission compensation
The FCA has set up an industry-wide redress scheme for customers treated unfairly through motor finance commission arrangements on agreements taken out between 2007 and 2024. If you had PCP or HP in that period, check the FCA website for the current status and how your lender will contact you — you don’t need a claims management company.
How terms differ between lenders
| Term | How it can differ |
|---|---|
| APR | Manufacturer-subsidised 0% or low APR vs. standard rates; personal loan APRs depend on credit score. |
| Deposit contributions | Manufacturer deposit contributions that only apply to PCP. |
| Balloon (GMFV) | How generous the guaranteed value is; higher balloon means lower payments but more interest. |
| Mileage and wear | Annual mileage allowance and excess mileage charge per mile. |
| Fees | Admin and option-to-purchase fees. |
| Early settlement | Statutory right to settle early; see our early repayment guide. |
Model PCP, HP and a personal loan in SMARTPRO with the same car price and compare total cost, not just the monthly payment.
Checklist
- Negotiate the car price first, then the finance.
- Compare total amount payable across PCP, HP and a loan.
- For PCP, check the balloon, mileage limit and excess charges.
- Get a GAP quote from an independent provider.
- Keep the agreement — it shows when you reach the 50% voluntary termination point.
This material is for general information only, describes UK rules in force on the publication date, and is not financial, legal or tax advice. Rules, schemes and lenders’ terms change — always check your agreement, your lender’s current terms and official sources such as the FCA, MoneyHelper and GOV.UK.