PCP vs Hire Purchase: Understanding Your Car Finance Agreement

The Two Main Types of Dealer-Arranged Car Finance

When you buy a car through a UK dealership using finance, the two most common products are Personal Contract Purchase (PCP) and Hire Purchase (HP). Both involve monthly payments to a lender, but they work differently at the end of the agreement. Crucially, both are covered by the FCA's investigation into discretionary commission arrangements.

What Is Personal Contract Purchase (PCP)?

PCP is the most popular car finance product in the UK. It became dominant during the 2010s and now accounts for the majority of new car finance sales. Here is how it works:

• Initial deposit: You typically pay a deposit (often 10% of the car's value).
• Monthly payments: You make fixed monthly payments for an agreed term, usually 24 to 48 months. These payments do not cover the full cost of the car.
• Guaranteed Minimum Future Value (GMFV): At the start of the agreement, the lender sets a predicted residual value for the car — known as the balloon payment or GMFV.
• End of agreement options: At the end of the term, you have three choices:
  1. Return the car and walk away (subject to mileage and condition limits)
  2. Pay the balloon payment to own the car outright
  3. Part-exchange the car and use any equity as a deposit on a new deal

PCP is attractive because monthly payments are lower than HP, since you are only financing the depreciation rather than the full value of the car. However, the interest rate applied to the agreement still affects the total cost significantly.

What Is Hire Purchase (HP)?

Hire Purchase is a more straightforward product. You borrow the full value of the car (minus any deposit) and repay it in fixed monthly installments over a set term.

• Monthly payments: You pay a fixed amount each month until the full loan — including interest — is repaid.
• Ownership: Once the final payment is made (sometimes including a small "option to purchase" fee), you own the car outright.
• No balloon payment: Unlike PCP, there is no large payment at the end.
• Higher monthly payments: Because you are paying off the full value, monthly payments are typically higher than PCP for the same car.

HP agreements were common before PCP became dominant and remain popular for used cars and buyers who want straightforward ownership.

How Both Were Affected by DCAs

Both PCP and hire purchase agreements could be — and frequently were — arranged using discretionary commission arrangements (DCAs). The mechanism was the same regardless of product type:

• The lender set a minimum interest rate for the customer based on their credit profile
• The dealer had discretion to offer any rate above this minimum (up to a ceiling)
• The dealer's commission from the lender increased as the rate increased
• Customers were not told the dealer was influencing the rate or earning commission on it

For a PCP agreement, even a small increase in APR — say from 6% to 9% — can add hundreds or thousands of pounds to the total amount repayable over a three or four year term. The FCA estimates the average overpayment was around £700 per agreement, though some customers with larger or longer agreements paid significantly more.

Which Type Did You Have?

You can confirm your finance type from the original agreement document. Look for the heading — it will explicitly state "Personal Contract Purchase Agreement," "Hire Purchase Agreement," or "Conditional Sale Agreement." If you no longer have the paperwork, check your credit file or make a Subject Access Request to your lender.

Key Differences at a Glance

Other Finance Types: Are They Covered?

Some other finance products may also be in scope:

• Conditional sale: Very similar to hire purchase — typically covered.
• Personal loan from a bank: If arranged independently (not through the dealer), this is generally not covered because no dealer commission was involved.
• Leasing (PCH): Personal Contract Hire (leasing) is a different product where you never own the car. It is generally not covered by the current investigation, as commission was structured differently.
• Dealer in-house finance: Some manufacturers' captive finance companies (like Volkswagen Financial Services, BMW Financial Services) used DCA models and are within scope.

What Happens If I Claimed Voluntarily Under the Terms of the Agreement?

If you returned a PCP car under Voluntary Termination rights (under Section 99 of the Consumer Credit Act), this does not prevent you from making a separate mis-selling claim. The voluntary termination and the commission mis-selling are separate issues.