Nearly 90% of new cars in the UK are bought on finance, with Personal Contract Purchase (PCP) and Hire Purchase (HP) being the two most common products. While both involve monthly payments, they work very differently — and the contract terms carry different risks. PCP agreements in particular are complex, with balloon payments, mileage limits, and condition requirements that can leave you owing thousands at the end of the term. Following the FCA's 2024 review of motor finance commission arrangements, understanding these agreements has never been more important.
What is a PCP vs HP Terms?
Personal Contract Purchase (PCP) and Hire Purchase (HP) are both regulated credit agreements for financing a car. Under HP, you pay a deposit plus monthly instalments and own the car after the final payment. Under PCP, monthly payments are lower but there's a large balloon payment (Guaranteed Minimum Future Value or GMFV) at the end — you can pay it to own the car, return the car, or use any equity as a deposit on a new deal. Both are regulated by the Consumer Credit Act 1974 and the FCA.
Red flags to watch for
Low mileage limits reduce your monthly payment but expose you to excess mileage charges (typically 6-12p per mile) that can add up to thousands if you exceed the allowance.
The BVRLA fair wear and tear guide is the industry standard, but some finance companies apply stricter criteria that result in hefty condition charges at return.
PCP monthly payments can look affordable while carrying a high representative APR. The total amount payable (deposit + all payments + balloon payment) is what actually matters.
Following the FCA's 2024 motor finance review and the Supreme Court's consideration of commission disclosure, undisclosed commission arrangements may render the agreement unfair or voidable.
While you have a right to settle early under §94-97 of the CCA 1974, the settlement figure calculation should be transparent. Some companies apply front-loaded interest that makes early settlement disproportionately expensive.
Your legal rights
Both PCP and HP are regulated credit agreements under the Consumer Credit Act 1974 (CCA). Key rights include: a 14-day withdrawal period from the date you receive the agreement (CCA §66A); the right to voluntary termination once you've paid half the total amount payable (CCA §99-100) — for PCP, this includes half the balloon payment; the right to early settlement with a rebate of future interest (CCA §94-97); and protection under §75 of the CCA if the cash price exceeds £100 but doesn't exceed £30,000 (joint liability with the credit provider). The FCA regulates motor finance firms and has investigated commission arrangements (discretionary and non-discretionary) that may have created conflicts of interest. The BVRLA's fair wear and tear guide is the accepted standard for PCP return conditions.
Questions to ask before you sign
- 1What is the annual mileage allowance, and what is the per-mile excess charge?
- 2What standard will be used to assess fair wear and tear at return?
- 3What is the total amount payable over the full term (including the balloon payment)?
- 4Has any commission been paid to the dealer, and if so, how much and what type?
- 5What would the early settlement figure be after 12, 24, and 36 months?
- 6At what point can I exercise voluntary termination under §99 of the CCA?
Disclaimer: This guide is for educational purposes only and does not constitute legal advice. Contract law varies by jurisdiction and individual circumstances. Always consult a qualified legal professional before making decisions based on this information.