Car finance options explained: PCP vs PCH vs HP and more

You’ve done your research, read our reviews and found the car of your dreams. Now comes the hard part: figuring out how you’re going to pay for it.

From a relatively simple cash purchase to the seemingly endless finance options and all the associated jargon, it can feel overwhelming.

But as we explain here, once you understand the basics it’s much easier to work out what’s best for you.

PLEASE NOTE: the information in this article is for information purposes only and does not constitute financial advice. Make sure you refer to the particular terms and conditions of a provider before committing to any financial products.

Dealership or broker? Get the best deal by reading our guide on where to buy a car

PCP vs HP vs PCH

If you're not looking to buy a car outright, there are three main finance options available to you.

Personal contract purchase (PCP)

With PCP, you typically pay an initial deposit followed by regular monthly payments over a set period. Payments are based on factors including the size of the deposit, expected depreciation and agreed interest rate. You also have to set a mileage allowance at the start – exceeding this will incur a fee. All maintenance and tax costs are paid by you. Throughout the contract, the car remains the property of the finance company. At the end of the contract, you can either return the car or pay a final balloon payment to buy it outright.

Hire purchase (HP)

HP is similar to PCP, but at the end of the contract you pay a nominal fee (usually £100-£500), at which point you become the owner of the car. You’re effectively paying off the full value of the car across the length of the contract, which means monthly payments will be higher than other forms of finance. The deposit due at the start also tends to be higher. But since you’ll own the car at the end of the contract, you don’t have to worry about setting mileage limits or handing the car back to the lender in a certain condition.

Personal contract hire (PCH)

Also known as leasing, PCH is similar to PCP – the major difference being that there’s no option to keep the car at the end of your contract. Instead, you just hand it back. Since you’re not paying off the full value of the car, monthly payments are usually lower than with PCP. Leasing companies also tend to pay the road tax on your behalf. As with PCP, however, you’re responsible for maintenance costs. You also have to adhere to mileage allowances, and any damage may incur additional costs at the end of your agreement.

Other ways to finance a car purchase

Personal loan

Unlike other finance options, taking a personal loan from a bank or building society means you’ll own the car from the outset, so you won’t need to worry about things like mileage allowances. However, you won’t benefit from finance incentives from dealerships – and monthly payments are likely to be relatively high. The amount you can borrow and the interest rate you pay depend on factors including your financial circumstances. Depending on the loan terms, your car may be repossessed if you miss payments. Our personal loans page shows you the best rates on the market.

Subscription

Car subscriptions differ from other types of finance, insofar as you’re effectively paying for access to a car, not the car itself. Depending on the manufacturer, you can change your car at short notice and the subscription can run for longer than a traditional rental. Monthly payments also include things like servicing, tax, insurance and maintenance costs (but not fuel). The main downside is the cost: subscriptions are very expensive compared to other types of finance, especially if you use it long-term. Not all manufacturers offer subscriptions, either.

Cash

Unlike the other options, when you pay the full amount in cash you don’t have monthly payments, which means you don’t pay interest. As you own the car from day one, you’ll have no restrictions on mileage – and you can sell it whenever you please. Of course, as you’re buying the car outright, you’ll need to pay what is likely to be a significant sum in one go. And although you won’t have to worry about paying fees for damage as with a car on finance, any damage will still affect the car’s resale value if and when you decide to sell it.

What's best: cash or finance?

In recent years, personal contract purchase (PCP) has become by far the most popular way to get behind the wheel of a new car. In fact, data from both the Finance & Leasing Association and the Society of Motor Manufacturers and Traders shows that, in the 12 months up to August 2024, 81% of new cars registered to private buyers were bought using finance. Of those, 83% were paid for through PCP deals.

Finance might be popular but, if you can afford it, buying a new car outright with cash seems the obvious choice – after all, the car will be yours from the outset and you won’t have to pay any interest nor worry about any restrictions. But as we’ll dig into a little later, even if you do have the cash, it’s still worth checking out what financing deals are available.

Bear in mind also that with a cash purchase, your money is immediately tied up in the vehicle you buy. With a PCP deal, you could invest the money you would have otherwise spent, then benefit from interest on it before making the final balloon payment. Of course, whether this approach is right for you depends on the finance terms offered and the interest you can get on your savings. 

Finance deals do have drawbacks. In most cases, you won’t own the car during the agreement, which means you can’t sell it, will need to stay within agreed mileage limits and will be responsible for damage if you decide to return the car at the end of the agreement.

Whether cash or finance is the best value also varies between car brands. Some offer 0% APR deals and hefty deposit contributions, which can make it cheaper to get a car through finance. In contrast, high interest rates and lower deposit contributions can add significantly to your monthly payments and the overall value of the deal.

It’s worth highlighting here that applying for car finance often results in a ‘hard’ credit check from the lender.

Navigating car finance

If you decide finance is the best route for you, there are a number of things you should look out for. First, it’s important not to overstretch yourself. For relatively low monthly payments you can find yourself driving a new car, but you’ll also be responsible for meeting those payments each month, which might be tricky if your circumstances change.

You’ll also have to set an annual mileage figure for your contract, which typically ranges from 5,000 to 30,000 miles per year. The higher the mileage, the more you’ll pay, in order to cover additional depreciation. Exceed this and you may have to pay an excess at the end of the term. Each mile extra typically costs around 10p, so underestimating your mileage by 3,000 miles per year on a four-year contract could cost an extra £1,200. This fee is payable at the end of your contract, but you won’t need to pay it if you make the final payment and take ownership of the car.

Some PCP deals let you adjust the mileage part way through your contract, but be aware an increase will probably result in your monthly payments going up. Even if your contract doesn’t mention being able to change the mileage, if you find yourself going over it’s still worth contacting your finance company as it might be able to help.

How to buy the best new car: get our top tips on buying the right new car for you

If you plan to return the car at the end of the contract, you’ll be financially responsible for any damage to it, as per the terms in your contract. Most finance providers assess vehicle damage using the British Vehicle Rental and Leasing Association’s (BVRLA) damage standards, but we recommend checking the small print of your contract or asking the finance company about its damage policy – some may offer to cover damage up to a certain amount.

The BVRLA also recommends you thoroughly assess your car around three months before it's due to be returned. If you spot any damage beyond fair wear and tear (something that’s tricky to define in itself), it may be worth arranging to repair the car yourself or through your insurance to avoid paying damage return fees. Note that your contract may specify that you have to use a workshop that is approved by the manufacturer for any repairs. 

You don’t have to decide whether to make the final payment until the end of your contract, but if you think it’s likely you will buy the car, pay close attention to the final payment amount. Set at the start of your contract, it’s based on factors such as the car’s expected value at the end of the contract, your initial deposit and your monthly payments.

Bumpy road ahead?

A lot can happen during the course of a typical car finance contract. If a change in circumstances means you can no longer afford to meet your monthly payments, speak to your finance provider as soon as possible. It may be able to extend the term of your contract, or allow you to defer payments for a short period of time. You can also request a voluntary termination, but only if you’ve paid (or are willing to pay) 50% of the value of the contract.

Voluntary termination doesn’t normally affect your credit score, but you’ll have to return the car (including any damage and mileage fees) and you won’t be due a refund if you’ve paid more than 50% of the total amount.

If a car you’ve got on finance is involved in a serious accident and your insurer decides to write it off, you should tell your finance provider, as it will still own the car. Your insurer would then pay out for the value of the car, with part (or all) of this payment going to the finance company. Once this is complete, the insurer becomes the owner of the vehicle and scraps it.

Best cars for 2025: new or used, discover the cars that aced our tough lab tests

You could also buy the car from the insurance company and repair it yourself, although it will be declared a category write-off when it’s returned to the road, reducing its value to future buyers.

You may also be aware of the ongoing investigation into potential mis-selling of car finance products. The Financial Conduct Authority (FCA) has found widespread evidence that lenders who allowed brokers to adjust interest rates on car finance were doing so without informing customers, which led to many people overpaying.

The FCA outlawed this practice in January 2021, which means finance agreements after this point aren’t affected, but if you’ve previously had car finance agreements or just want to find out more, read our car finance mis-selling investigation news story.

Get the best car finance deal

Follow our tips below to get the best deal possible when financing a car purchase.

1. Take your time: Search for typical available discounts, along with finance offers from the manufacturer’s website, as this will give you more confidence to haggle in the showroom.
2. Set a budget: Whether it’s a cash amount or a monthly payment, decide your limit – and stick to it no matter what. Avoid revealing your budget too early, as this can lead salespeople to steer you to options that maximise their profit rather than meet your preferences.
3. Be flexible: Dealers typically offer bigger savings on cars they have in stock, which can work in your favour if you’re willing to be flexible on things such as colour and specification. Dealers may offer additional reductions on these cars if you haggle.
4. Check all the options: What appears to be a great saving might not represent the best value. For example, at the time of writing, the £7,300 finance deposit contribution offered by Volkswagen on its ID.3 model sounds appealing. However, it’s tied to a four-year PCP at 5.9% APR. The better deal here is actually the three-year 0% APR PCP, even though it has a lower £3,950 deposit contribution.
5. Get the totals: Juggling these figures isn’t easy. Instead, it’s better to compare the value between different models by asking for the total amount payable for each. This figure accounts for dealer or manufacturer discounts, deposit contributions, APR and the car’s future value. A car that has a cheaper discounted price might actually end up being more expensive over the course of the contract.
6. Don't reveal all: If you're part-exchanging, only reveal you’re doing so after the dealer has confirmed the discount on your new vehicle. This means you’ll know exactly what discount you’re getting without the part-exchange muddying the waters and can also compare the price offered to selling via other methods (see our guide on how to sell a car for more).

Can you get car finance with bad credit?

Like any other loan or repayment scheme, dealers and lenders will often take your credit score into account when you apply for car finance. If your credit history isn’t good, lenders may not offer you the money for a car in fear of you missing payments, but that doesn’t make it impossible – as long as you’re willing to make adjustments.

You can potentially get car finance with bad credit by offering to pay more upfront. If you agree to pay a larger deposit from the outset, it gives you cheaper monthly payments and the lender more security in agreeing the deal. 

Another option is to choose a vehicle more in line with your budget (our new and used car reviews will help here, as will our guide to the best cheap cars). Try to pick out a car with payments you'll be able to keep on top of comfortably to assure yourself and the lender moving forward.

A lender may also be more likely to give you car finance if you have a guarantor, who will make payments if you’re not able to. To improve your chances of being granted credit in the future, it’s beneficial to start making steps to improve your credit rating.

While it’s usually not a quick process to transform your credit score, there are some easy steps available to get you on your way. Find out more in our guide on how to improve your credit score.

Get personalised car-finance guidance

While we’ve explained the pros and cons of the various ways to buy a car and what to look out for, what’s right for one person may be completely unsuitable for someone else. Our Which? Money 1-to-1 guidance team has car finance experts who can offer guidance based on your circumstances and requirements. If you already have a Which? Money membership, you can arrange an appointment via your account. If not, sign up today from just £4.99 per month.

Drive smarter and cut costs using our expert advice. Get our Cars newsletter – it's free monthly

Which? Limited is registered in England and Wales to 2 Marylebone Road, London NW1 4DF, company number 00677665  and is an Introducer Appointed Representative (FRN 610689) of the following:1. Inspop.com Ltd for the introduction of non-investment motor, home, travel and pet insurance, who are authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635). Inspop.com Ltd is authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635) and is registered in England and Wales to Greyfriars House, Greyfriars Road, Cardiff, South Wales, CF10 3AL, company number 03857130. Confused.com is a trading name of Inspop.com Ltd. 2. LifeSearch Partners Limited (FRN656479), for the introduction of Pure Protection Contracts and Private Health Insurance, who are authorised and regulated by the FCA to provide advice and arrange Pure Protection Contracts and Private Health Insurance Contracts.  LifeSearch Partners Ltd is registered in England and Wales to 3000a Parkway, Whiteley, Hampshire, PO15 7FX, company number 03412386.3. HUB Financial Solutions, for the introduction of equity release advice, who are authorised and regulated by the Financial Conduct Authority (‘FCA’) to provide advice and guidance on financial products for those who have retired or are approaching retirement (FCA Firm Reference Number: 455713). HUB Financial Solutions is registered in England and Wales to Enterprise House, Bancroft Road, Reigate, Surrey RH12 7RP, company number 05125701.4. Alan Boswell Insurance Brokers Ltd (FRN 301), for the introduction of non-investment landlord insurances, who are authorised and regulated by the Financial Conduct Authority to provide advice and arrange insurance contracts. Alan Boswell insurance brokers Ltd is registered in England at Prospect House, Rouen Rd, Norwich NR1 1RE, company number 02591252.Other financial services:Mortgage service provided by London & Country Mortgages (L&C), Unit 26 (2.06), Newark Works, 2 Foundry Lane, Bath BA2 3GZ. London & Country are authorised and regulated by the Financial Conduct Authority (registered number: 143002). The FCA does not regulate most Buy to Let mortgages. Your home or property may be repossessed if you do not keep up repayments on your mortgage.We do not make, nor do we seek to make, any recommendations or personalised advice on financial products or services that are regulated by the FCA, as we’re not regulated or authorised by the FCA to advise you in this way. In some cases, however, we have included links to regulated brands or providers with whom we have a commercial relationship and, if you choose to, you can buy a product from our commercial partners. If you go ahead and buy a product using our link, we will receive a commission to help fund our not-for-profit mission and our campaigns work as a champion for the UK consumer. Please note that a link alone does not constitute an endorsement by Which?.