PCP vs HP vs Personal Loan: Which Car Finance Actually Costs Less?

You've found the perfect car. £25,000. The dealer offers you three ways to pay. They all sound reasonable. They're all wildly different in total cost.

Let's do the maths the dealer won't show you.

The Three Main Options

Personal Contract Purchase (PCP): Low monthly payments, balloon payment at the end Hire Purchase (HP): Higher monthly payments, you own the car at the end Personal Loan: Borrow from a bank, pay cash to the dealer

Same car. Same price. Very different outcomes.

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PCP: The "Affordable" Illusion

PCP is the UK's most popular car finance. Here's how it works:

Example: £25,000 car on PCP

Deposit: £2,500 (10%)
Monthly payment: £299 for 48 months
Final "balloon" payment: £10,500
APR: 8.9%

Total you'll pay:

Deposit: £2,500
Monthly payments: £299 × 48 = £14,352
Balloon payment: £10,500
Total: £27,352

Cost of finance: £2,352

But wait. Most people don't pay the balloon. They hand the car back and start a new PCP. Which means:

You paid £16,852 over 4 years
You own nothing
You're back at square one

PCP is essentially a 4-year rental with extra steps.

HP: The Straightforward Option

Same car, Hire Purchase:

Example: £25,000 car on HP

Deposit: £2,500 (10%)
Monthly payment: £512 for 48 months
Final payment: £0 (you own it)
APR: 7.9%

Total you'll pay:

Deposit: £2,500
Monthly payments: £512 × 48 = £24,576
Total: £27,076

Cost of finance: £2,076

At the end, you own the car outright. No balloon payment decision. No pressure to get a new deal.

Personal Loan: The Hidden Winner?

What if you got a loan from your bank instead?

Example: £22,500 personal loan (after £2,500 deposit)

Interest rate: 6.9% APR
Monthly payment: £538 for 48 months
Total repayment: £25,824

Add your deposit back:

Deposit: £2,500
Total: £28,324

Wait, that's more expensive? Sometimes. But here's the thing:

Advantages of personal loan:

You're a cash buyer - negotiate £1,000-£2,000 off the price
No mileage limits
No condition penalties
You can sell anytime without permission
Better rates if you have good credit

If you negotiate £2,000 off as a cash buyer:

Car price: £23,000
Loan needed: £20,500
Total repayment: £23,547
Add deposit: £26,047

Suddenly it's the cheapest option.

The Mileage Trap

PCP contracts have mileage limits. Typical allowances:

8,000 miles/year
10,000 miles/year
12,000 miles/year

Exceed them? You'll pay 8p-15p per mile.

If you do 15,000 miles/year on a 10,000 mile contract:

Excess: 5,000 miles × 4 years = 20,000 miles
Penalty at 10p/mile: £2,000

That "cheap" PCP just got expensive.

Average UK mileage: 7,400 miles/year But: Commuters, salespeople, and parents of teenagers do far more

The Condition Catch

Return a PCP car with damage beyond "fair wear and tear" and you'll be charged.

Common charges:

Alloy wheel scuff: £50-£100 per wheel
Dent larger than 15mm: £75-£150
Interior stain: £100+
Windscreen chip not repaired: £75

These add up. Budget £200-£500 for "return condition" costs on most PCP deals.

The Depreciation Reality

Here's what actually makes the decision:

New car depreciation:

Year 1: 15-35% (ouch)
Year 2: 10-15%
Year 3: 10-15%
After 3 years: 40-60% of value gone

PCP lets you:

Avoid owning a rapidly depreciating asset
Always drive a relatively new car
Never deal with major repairs (warranty covers it)

HP and loans mean:

You eat the depreciation
But once paid off, you have a free-to-run asset
Years 5-8 of ownership are the cheapest per mile

The Real Question

Choose PCP if:

You want a new car every 3-4 years
You drive predictable, low miles
You can't afford HP payments
You accept you'll always have a car payment

Choose HP if:

You plan to keep the car 5+ years
You want to own something
You might do high miles
You can handle higher monthly payments

Choose a personal loan if:

You have good credit (lower rates)
You want negotiating power
You might sell before the term ends
You hate being tied to a dealer

The "Just Lease It" Alternative

Company car or personal lease? Different calculation entirely.

Personal Contract Hire (PCH):

Monthly payment, return the car, done
No balloon decision
No depreciation gamble
You never own anything

For some people, this simplicity is worth paying extra.

Running the Numbers Yourself

Before you sign anything:

Calculate total cost - Not monthly payment. TOTAL.
Add all fees - Arrangement fee, option-to-purchase fee, excess mileage estimates
Compare to buying used - A 2-year-old car is 30-40% cheaper
Factor in your actual miles - Be honest
Consider how long you'll keep it - 3 years? 7 years? Forever?

The dealer wants you focused on "£299/month sounds affordable."

The question is: affordable compared to what?

Use the loan calculator above to compare your options. Then sleep on it. Car finance is a 4-year commitment that shouldn't be made in a showroom.