Bethany Weir
01 May 2023
What is Personal Contract Hire?
Personal Contract Hire (PCH) is commonly referred to as leasing. This model lets you pay a set monthly amount for a brand-new car every 2-4 years. At the end of the agreed contract, the car is simply returned to the leasing company. You’re able the to take a new deal out or walk away.
If requested, the finance company may give you first refusal to buy the vehicle; however, they are under no obligation to, and this will be valued in line with market conditions and current market value. This means, if the used car market is inflated, the offer to buy will be in line with this.
When handing the car back, you’ll need to ensure that the condition of the vehicle reflects fair use. The finance company will need to adhere to the BVRLA fair wear and tear standards for damage, and you may have to pay an excess mileage fee if you are over mileage. However, this will be agreed at the start of your contract.
Unlike personal contract purchase agreements, you don’t have the option to own the car at the end. However, leasing tends to produce the lowest monthly rental to drive a new car.
What is Personal Contract Purchase?
Personal Contract Purchase (PCP) differs mainly from Personal Contract Hire in that you have more options at the end of your agreement term. The three options are:
- Hand the car back to the provider
- Sell the vehicle (either back to the provider or to another company) and keep equity, if there is any available.
- Buy the car by paying the Balloon payment or re-financing the balloon.
There are factors to consider on the PCP option that you may not need to consider on a lease such as the APR (Annual Percentage Rate). This is the amount you pay to the finance company to finance your car.
Personal Contract Purchase agreements are a loan agreement where on new cars you would typically pay a lower rate of interest (2-8%). However, on used cars you may pay a much higher rate of interest (up to 20%). This is a key factor to consider if looking at a PCP agreement as if the interest rate is high, it will limit the ‘flexibility’ you have within the agreement.
Balloon Payment
On a PCP agreement you will typically have a deposit at the start of the agreement, but there will be a balloon payment at the end of the agreement. Even if you don’t have any interest in owning the car at the end, you will still agree to this final settlement fee.
The final balloon payment is determined by the finance company at the start of the agreement. They will calculate the Guaranteed Minimum future Value (GMFW) of the car at the end of the contract term.
The monthly payment for your PCP deal is the difference between the car’s retail price from when you receive the car and it’s predicted end of contract value.
Is PCH or PCP better for me?
Several factors needed to be considered to decide.
How you plan to use the vehicle, whether you want to own it and your monthly budget will give you an indication of what type off deal you should go for.
Ownership
If owning the car at any point is important to you then PCP will be the more suitable option as you have this option to buy, and the price is set from the start.
Most people that finance a car using PCP don’t go on to pay the balloon to own the car. In most cases, people will change their car for a new one once the PCP term comes to an end.
Budget
Commonly, PCP will cost more over the course of the contract when compared to PCH. This is due to several factors but usually due to extra flexibility involved with PCP, and better discounts being offered through PCH funding,
Many people will take out a PCP deal and treat it like a PCH opting not to exercise the final payment to own the car. Also, it can be sold on the opportunity to have equity in the deal at the end; this is very much a risk as it depends on the market conditions at the time, and as we’ve recently seen this is hard to predict. The Manufacturer owned finance companies (e.g., Mercedes-Benz Finance, Audi Finance etc.) tend to set the balloon payments higher, meaning it will be unlikely you will have equity at the end of the deal.
At the start it’s worth thinking if you ever want to own the car, and if not, it’s advised you take the cheaper overall option. If the PCH contract saves you £100 per month, then you’ve effectively earnt the equity upfront is another way to think about it.
Flexibility
The PCP will offer you the most flexibility out of the two options. You have three options at the end of a PCP deal reference above, compared to the only option to hand back with PCH.
Usually, the ability to hand back a car after 3 to 4 years is appealing as it gives people the opportunity to adjust as lifestyle demands change. Also, repair and maintenance costs are a big cost of car ownership. The older the car gets, the more these tend to increase. Therefore, leasing is often a popular method as it removes that hassle.
Early termination
PCP and PCH agreements differ when it comes to early termination.
PCP deals are often mis-sold as ‘you’re able to hand the car back once you’ve paid 50%’. In people’s minds understandably this is interpreted at 24 months into a 48-month contract I’m able to walk away.
However, the truth is you’re able to walk away once you have paid 50% of the total finance borrowed, this includes admin fees, interest fees, and the balloon payment. This means it isn’t quite as simple as halfway through. Generally, on a 48-month agreement, this will be around the 3.5-year mark. But again, dependant on the contract you have signed.
Both methods of funding have their place. However, it’s important for you to decide from the outset what is important to you. If ownership is, the PCP generally is the best option. If it is the lowest monthly cost and you’re likely to want a new car at the end the PCH is generally your best option.
We advise you don’t worry too much about the ability to have equity at the end. Dealerships will often use this to lure customers into PCP finance, and it’s often not the case and you end up paying more than you need to.
