How it works
Amount borrowed = price − deposit. HP: monthly payment = amount borrowed × r ÷ (1 − (1 + r)^−n), where r = APR ÷ 12 and n is the number of months, so the last monthly payment clears the loan. PCP: the balloon is discounted back over the term and taken off first, so monthly payments are lower and the balloon is due at the end.
A worked example
A £20,000 car with a £2,000 deposit at 9.9% APR over 48 months costs about £455.66 a month on HP, with £3,871.80 of interest. As PCP with a £7,000 balloon it is about £336.21 a month, but £5,138.10 of interest if you pay the balloon.
What to keep in mind
Treats the APR as a fixed annual rate divided by 12, with no separate fees. Dealers may add an option-to-purchase or admin fee, and PCP deals have mileage limits and excess wear charges. The rate you are offered depends on your credit record.
HP or PCP: what's the difference?
With hire purchase (HP) you pay off the whole amount borrowed in monthly instalments and own the car at the end. With personal contract purchase (PCP) part of the cost is left as a large final payment, the balloon or guaranteed minimum future value (GMFV). That makes monthly payments lower, but at the end you have to pay the balloon to keep the car, hand it back, or part-exchange it.
Worked example
Choose HP or PCP in the calculator. A £20,000 car with a £2,000 deposit, 9.9% APR over 48 months: on HP you pay about £455.66 a month and £3,871.80 of interest, £23,871.80 in total. As PCP with a £7,000 balloon, the monthly payment falls to about £336.21, but because more of the loan is outstanding for longer, the interest rises to £5,138.10 if you pay the balloon and keep the car.
How to make car finance cheaper
A bigger deposit reduces the amount you borrow and the interest. A shorter term raises the monthly payment but cuts the total cost. Compare the APR and the total amount payable, which must be shown on every finance quote, rather than the monthly payment alone.
Ending car finance early
Under the Consumer Credit Act you can settle the agreement early at any time, usually with a reduced interest charge. You also have the right to voluntary termination: once you have paid half of the total amount payable, you can hand the car back and owe nothing more, as long as it has been looked after.
Frequently asked questions
Is PCP or HP cheaper?
HP usually costs less in interest if you want to own the car, because the balance falls faster. PCP has lower monthly payments and the option to hand the car back.
What is a balloon payment?
On a PCP deal, the large optional final payment you make to keep the car. It is set at the start, based on the car's expected value at the end of the deal, and is shown on your quote as the GMFV or optional final payment. HP has no balloon: the last monthly payment is the final payment.
Is there a final payment on HP?
No. On hire purchase every monthly payment is the same and the last one clears the loan, so the car is yours with nothing extra to pay. Some HP deals add a small option-to-purchase fee with the last payment, usually £10 to £200.
How much is a £20,000 car on finance?
With a £2,000 deposit at 9.9% APR over 4 years, about £456 a month on HP, or about £336 a month on PCP with a £7,000 balloon.
Does this include fees?
No. Add any option-to-purchase or arrangement fee yourself, or use the dealer's representative APR, which already includes compulsory fees.
Sources & rates
Rates checked on 7 October 2026.
For general information and planning, not personalised financial or tax advice. Verify important decisions with a qualified adviser.