PCP vs HP: What's the Difference and Does It Affect Your Claim?

What Is PCP (Personal Contract Purchase)?

PCP is the most popular form of car finance in the UK. With a PCP agreement, you pay a deposit followed by monthly payments over a fixed term (usually 2-4 years). At the end of the agreement, you have three options:

• Return the car — hand it back with nothing more to pay (subject to mileage and condition)
• Make the balloon payment — pay the remaining lump sum (the Guaranteed Minimum Future Value) to own the car outright
• Part-exchange — use any equity in the car as a deposit on a new PCP deal

Monthly payments on PCP are typically lower than HP because you are not paying off the full value of the car each month. However, you do not own the car until you make the final balloon payment.

What Is HP (Hire Purchase)?

HP is a simpler form of car finance. You pay a deposit followed by fixed monthly payments over a set term (usually 2-5 years). Once you have made all the payments, you own the car. There is no balloon payment and no decision to make at the end.

Monthly payments on HP are higher than PCP because you are paying off the entire cost of the car. However, you are guaranteed to own the car at the end without any additional lump sum.

PCP vs HP: Comparison Table

Does Your Finance Type Affect Your Claim?

The short answer is: both PCP and HP are fully covered by the FCA Motor Finance Redress Scheme. Conditional sale agreements are also included.

What matters for your claim is not the type of finance, but whether:

• The finance was arranged through a car dealer (not directly with a bank)
• The lender paid a commission to the dealer
• That commission was not properly disclosed to you
• The dealer had discretion to influence your interest rate

In practice, both PCP and HP agreements arranged through dealers commonly involved discretionary commission arrangements. The FCA found that these arrangements were widespread across both finance types from 2007 to 2021.

How Compensation Is Calculated

The compensation calculation is similar for both PCP and HP:

1. The lender calculates the interest rate you would have received without the commission markup
2. They compare this to the rate you actually paid
3. The difference in interest paid over the life of the agreement is your base compensation
4. 8% simple interest per year is added from the date of the agreement

Because HP agreements tend to have higher monthly payments (as you pay off the full value), the total interest paid is often higher, which can mean larger compensation amounts. However, PCP agreements also carry significant interest charges, especially on the deferred balloon payment element.

What About Conditional Sale?

A conditional sale agreement is very similar to HP. You pay monthly instalments and own the car once the final payment is made. The main difference is a legal technicality about when ownership transfers. For the purposes of the FCA redress scheme, conditional sale agreements are treated the same as HP and are fully covered.

What About Personal Loans?

If you bought a car using a personal loan (not arranged through the dealer), this is not covered by the FCA Motor Finance Redress Scheme. The scheme specifically covers finance that was brokered by the car dealer, where the dealer acted as an intermediary between you and the lender.