What is hire purchase, and how is it different from PCP?
How hire purchase spreads the whole price rather than the depreciation, why the monthly payment is higher and the structure simpler, and what that means at the end.
- Difficulty
- beginner
- Time
- 15 min
- Read
- 5 min
Short answer
Hire purchase spreads the entire cost of the car over the term, so at the end you have paid for all of it and ownership transfers to you, usually on payment of a small option-to-purchase fee. Because nothing is deferred, the monthly payment is higher than PCP on the same car and term — and because nothing is being handed back, there is no mileage limit and no condition standard. The finance company still owns the vehicle until the last payment.
Hire purchase is the older and simpler of the two structures, and the comparison with PCP is best understood as a single question: are you funding all of the car, or only the part of it you will use up? Hire purchase funds all of it. That makes the monthly payment higher and the arithmetic transparent — the balance falls every month towards zero and finishes there. It also removes at a stroke the whole apparatus that PCP needs in order to work: the guaranteed future value, the mileage limit, the condition inspection, and the decision at the end. Whether that simplicity is worth the higher monthly payment is exactly the sort of question this guide will not answer for anyone.
Step by step
- Understand the structure.You pay a deposit, then equal monthly payments covering the rest of the cash price plus interest over the term. At the end the balance is zero and ownership passes to you, usually on payment of a modest option-to-purchase or transfer fee stated in the agreement.
- Compare it with PCP on the same car.For the same car, term and deposit, hire purchase has a higher monthly payment and typically a lower total amount payable, because nothing is deferred and therefore less interest accrues on a large outstanding balance for the whole term. Both figures are disclosed on both agreements.
- Note what hire purchase does not have.No mileage limit, because you are not handing the car back. No fair wear and tear inspection, for the same reason. No balloon payment and no decision at the end. If you drive high mileage or keep cars a long time, these absences are the substantive difference.
- Know who owns the car during the agreement.The finance company, exactly as with PCP, until the final payment and the option-to-purchase fee. You are the registered keeper. You cannot sell it without settling, and an outstanding finance interest will show on a vehicle history check.
- Understand conditional sale, which is nearly the same thing.A conditional sale agreement works almost identically but ownership transfers automatically on the final payment with no separate option fee. The Consumer Credit Act treats hire purchase and conditional sale together for most purposes, including voluntary termination.
- Check the voluntary termination position.Both hire purchase and conditional sale are covered by the voluntary termination right in the Consumer Credit Act 1974, which lets you end the agreement and return the vehicle once you have paid half the total amount payable. That has its own guide here.
- Read the fees as well as the rate.Documentation fees, option-to-purchase fees and any arrangement fee all form part of the total amount payable and are reflected in the APR. They are disclosed. Reading them is the only way to compare two agreements honestly.
- Get impartial guidance rather than dealer guidance.The person explaining the products to you in a showroom is selling one of them. MoneyHelper publishes free, impartial explanations of both, and it is worth reading before rather than after the conversation.
Common mistakes
- Assuming hire purchase means you own the car from the start — You do not. The lender owns it until the final payment and any option fee. The word purchase in the name refers to the outcome, not the position during the agreement.
- Comparing an HP quote and a PCP quote on the monthly figure — They are structured to produce different monthly figures for the same car. The comparable numbers are APR, for the cost of borrowing, and total amount payable, for what you hand over.
If it doesn't work
The monthly payment on hire purchase is much higher
Cause: You are funding the whole car rather than the depreciation — Fix: Expected and structural. Compare total amount payable and APR across both, and understand that the lower PCP payment is buying a decision at the end rather than a cheaper car.
You want to keep the car indefinitely
Cause: Different structures suit different holding periods — Fix: This is the case hire purchase was designed for, because the car becomes yours with no further payment. Whether that suits you is a question for MoneyHelper and your own circumstances.
You drive very high mileage
Cause: Mileage limits apply to PCP and leasing, not hire purchase — Fix: There is no mileage restriction on hire purchase because you are not handing the vehicle back. The car will simply be worth less, which is your loss rather than a charge.
Final payment made but the V5C still shows finance
Cause: The lender has not yet notified the vehicle databases — Fix: Ask the lender for written confirmation the agreement is settled, and check a history check a few weeks later. That confirmation is what a future buyer will want to see.
Want to settle early
Cause: Circumstances changed — Fix: Ask for a settlement figure, which the lender must provide. Early settlement rebates are governed by regulations and reduce the interest you would otherwise have paid. The settlement figure guide covers it.
Questions people ask
Which is cheaper overall, HP or PCP?
For the same car, term and deposit, hire purchase typically has a lower total amount payable, because less of the balance is outstanding for the full term. But the two are not doing the same thing — one ends with you owning a car and the other ends with a choice — so the comparison is only meaningful alongside what you actually want at the end.
What is the option to purchase fee?
A small fee, stated in the agreement, payable at the end of a hire purchase agreement to transfer ownership. It is included in the total amount payable and in the APR calculation. Conditional sale agreements generally do not have one, because ownership passes automatically.
Can I use hire purchase on a used car?
Yes, and it is widely available on used vehicles from dealers. Lenders usually apply limits on the vehicle's age and mileage at the end of the term, which is why very old cars are harder to finance this way.