PCP vs HP vs Lease — UK Car Finance Compared

At a Glance — PCP vs HP vs PCH (Lease)

PCP — Personal Contract Purchase

PCP is the UK's most common new-car finance product, accounting for roughly 80% of new-car retail sales. The mechanics: you pay a 10-20% deposit, monthly payments across 24-48 months at a representative APR around 7-10% in 2025/26, and at the end there is a large optional «balloon» payment — the Guaranteed Future Value (GFV) that the lender forecasts the car will be worth.

Three choices at the end:

• Pay the balloon and the car is yours (or refinance the balloon over 12-24 more months).
• Hand the car back with no further payment — subject to mileage and «fair wear and tear».
• Trade in equity — if the car's real value exceeds the GFV, that gap becomes the deposit on your next PCP.

Mileage limits are critical: a typical PCP is quoted on 8,000 or 10,000 miles/year, and excess mileage is billed at 5-15p per mile (premium brands 20p+). Setting a too-low mileage at the start makes the headline payment look great but creates a nasty bill at hand-back.

HP — Hire Purchase

HP is the traditional «pay it off» product. You put down ~10% as deposit and the rest of the car price plus interest is spread evenly across monthly payments over 24-72 months. There is no balloon; once the final payment clears, ownership transfers to you. APRs sit in roughly the same 7-10% range as PCP in 2025/26.

Monthly costs are noticeably higher than PCP because you are paying down the entire car value rather than just the depreciation above the GFV. The trade-offs are positive in other ways:

• No mileage cap and no «excess wear» charges.
• You build genuine equity — by month 18 you typically have meaningful resale value above the loan balance.
• The car appears on your driveway and not the finance company's books once paid off — useful for selling, modifying or part-exchanging on your timetable.

PCH — Personal Contract Hire (Lease)

PCH is a long-term rental. You pay an initial rental — typically 1, 3, 6 or 9 months upfront in a «1+47», «3+35», «6+23» pattern — followed by fixed monthly rentals. At the end you simply hand the keys back. You never own the car and there is no balloon or buy-out option in a true PCH.

Because the leasing company carries the full residual-value risk on hundreds of similar cars and can sell into the trade efficiently, headline monthly costs are usually 15-30% lower than PCP. Optional maintenance packages (covering servicing, MOT and tyres) typically add £20-£50/month. Mileage rules are strict — excess miles are charged at the contractual rate and applied at hand-back.

PCH has been particularly popular for EVs in 2025/26 because residual-value uncertainty has dragged on used EV prices — letting the leasing company carry that risk is attractive.

Worked Example — £30,000 Car, 36 Months, 10,000 miles/year

Reading the numbers: PCH is cheapest if you only want to drive the car for three years and walk away. HP is the cheapest route to actually owning the car outright (no balloon paid separately). PCP sits between the two — and gives you a decision point at month 36 rather than locking you in.

Tax Treatment for Individuals and the Self-Employed

For most people buying a personal car, none of these products are tax-deductible — the car is personal property and the finance is consumer credit. Three exceptions matter:

• Salary sacrifice on EVs — Benefit-in-Kind is just 3% in 2025/26 (rising 1 percentage point per year to 7% by 2029/30). A £40,000 EV through salary sacrifice costs a higher-rate taxpayer roughly £40/month in BIK tax — by far the most efficient route to a new EV.
• Self-employed (sole trader) actual-cost method — claim the business-use percentage of HP interest plus capital allowances, or for PCH the business-use percentage of monthly rentals. CO2 over 50g/km triggers a 15% lease rental restriction.
• Limited company — the company can buy or lease the car; the driver pays BIK on private use, and the company gets corporation-tax relief on lease rentals or capital allowances (100% FYA on new electric cars until at least April 2026).

Pros and Cons

Voluntary Termination — The CCA 1974 Escape Clause

Both PCP and HP are regulated agreements under the Consumer Credit Act 1974. Section 99 gives you a statutory right to terminate by handing the car back, provided you have paid at least 50% of the «total amount payable» — that includes deposit + monthly payments + balloon for PCP, and deposit + all monthly payments for HP.

If you have paid less than 50%, you can still terminate but must top up the difference. You remain liable for excess-mileage charges and damage beyond fair wear and tear, but not for the remaining finance instalments. This is genuinely useful as an escape route if your circumstances change — and it is not available on a PCH lease.

PCP Equity — How It Actually Works

The Guaranteed Future Value is set at the start of the agreement and does not change. If the car's actual market value at month 36 exceeds the GFV, that gap is yours:

• Positive equity — sell privately for above the GFV, settle the balloon, pocket the difference. Or roll the equity into a new PCP deposit.
• Zero equity — hand the car back and walk away. The lender carries the loss.
• Negative equity («underwater») — hand it back. Unlike HP where the falling resale value is your problem, PCP's Guaranteed Future Value protects you from depreciation surprises.

That GFV protection is the single most under-appreciated feature of PCP, especially during periods of unstable used-car prices.

GAP Insurance

If your car is written off, your motor insurer pays «market value» on the day — which can easily be £3,000-£8,000 less than the outstanding finance in the first 18 months. GAP (Guaranteed Asset Protection) insurance pays that shortfall.

GAP is most important in months 1-24 of a PCP or HP. A typical 3-year GAP policy bought directly (not from the dealer) costs £150-£300; dealer GAP is usually £400-£700 for the same cover. PCH leases normally include equivalent cover automatically via the leasing company — read the schedule to confirm.

2025/26 Tax and Reform Context

• Insurance Premium Tax (IPT): unchanged at 12% on motor insurance.
• EV VED: from 1 April 2025, EVs pay road tax — £10 first year, then £195/year standard rate, plus the £425/year «expensive car» supplement for years 2-6 on cars listed over £40,000 (which is most new EVs).
• BIK on EVs: 3% in 2025/26, 4% in 2026/27, 5% in 2027/28, then 6% and 7% — still the single best company-car tax break.
• PCH on EVs: increasingly attractive — leasing companies absorb residual-value risk that has been volatile since 2023.

Decision Tree — Which Product Fits You?

• Keep your cars for 5+ years and don't plan to swap? → HP. You will own the car outright sooner and avoid the «forever payment» trap.
• Like a new car every 2-3 years and want flexibility? → PCP. The GFV protects against depreciation and the equity option keeps doors open.
• Don't care about ownership, low-to-medium mileage, want lowest monthly cost? → PCH lease. Especially compelling on EVs in 2025/26.
• High mileage (15,000+ per year)? → HP. Mileage caps make PCP and PCH uneconomic.
• Can access salary sacrifice for an EV? → that almost always beats all three. Use PCP/HP/PCH for non-EVs or where salary sacrifice is unavailable.