Car leasing and personal contract hire explained
Thinking of leasing a car? Our guide to personal contract hire tells you all you need to know.
Long popular in the US, car leasing is now growing over here in the UK too.
One of the main forms of leasing is personal contract hire (PCH).
If you’re thinking this could be right for you, here are some things to consider before taking the plunge.
How does PCH work?
PCH effectively involves renting a vehicle from a car finance company.
With personal contract hire, you lease the car over the agreed contract period, and pay an initial deposit - normally the equivalent of three, six, nine, or 12 months worth of payments.
Leasing agreements tend to be for set periods: 12, 24, 36 and 48 months are the most common terms, although others do exist.
Generally, the longer the agreement the lower the monthly payments tend to be.
What’s the difference between PCH and PCP?
PCH has some similarities with personal contact purchase (PCP), another form of car finance.
With both PCH and PCP you’ll be asked to pay an initial sum followed by monthly payments.
But with PCH you’re only ever renting the vehicle, whereas with PCP you’re actually paying off the depreciation of the car.
The major difference, however, comes at the end of the agreement.
With PCH, at the end of the fixed term you simply give the car back to the finance company.
With PCP, on the other hand, you’re given the option of taking ownership of the vehicle. You do this by paying what’s known as the agreed guaranteed minimum future value, or balloon payment.
What are the pros of PCH?
There are a number of advantages to PCH compared with, say, PCP or owning a car outright.
The first is that monthly payments for a comparable vehicle tend to be cheaper with PCH than PCP.
Another plus is that you get to drive a new vehicle without any depreciation worries. This is because at the end of the agreement you simply get to give it back and lease a new vehicle, if you wish.
This is also true to some extent with PCP, although depreciation will be a concern if you wish to buy the vehicle at the end.
A third advantage with PCH is that deals sometimes include a maintenance package that covers running costs (excluding fuel), such as annual car tax and regular servicing.
Finally, and perhaps one of the main reasons why PCH is becoming so popular, is simply that you get the freedom to change vehicles every few years.
What are the cons of PCH?
There are a number of restrictions to be aware of before you take out a PCH agreement.
Mileage limits are one the main concerns. Each PCH deal will contain an agreed mileage limit, and if you go over this you may have to pay a financial penalty.
Most agreements also require you to return the car in “good repair and condition”. So if you damage the car, fair wear and tear excluded, the hire company could charge you for any repairs.
Some hire companies also impose restrictions on taking the car abroad. If you do want to take an overseas trip you may need permission and/or pay an extra charge.
Finally, and it’s not so much a con as something to consider, is that you obviously won’t own the vehicle – or have the option to – at the end of the term.
If you want to own your own car, then PCH isn’t the right option for you.
Can I cancel a PCH agreement before the rental period ends?
Early termination of a contract is usually at the discretion of the finance provider.
Some impose a fee of 50% of any outstanding rental period.
Others calculate a fee on an individual basis, taking into account the length of the contract, mileage allowance, and any outstanding rentals.
The finance provider’s cancellation policy should be set out in your contract, so do read it carefully before you sign up.
Is there anything else to know?
A PCH agreement is a form of finance, so it’s worth knowing that you’ll be credit checked before an agreement is allowed.
Another important thing to know is that PCH deals won’t include car insurance.
Each driver is rated on an individual basis by insurance companies, so pricing in insurance tends to be too tricky.
How do I get the best deal?
You should look at your own financial circumstances and work out how much you can afford to pay each month.
Then it’s just simply a case of shopping around and comparing deals on a site such as Confused.com.
As well as the monthly fixed payments, remember to factor in any mileage penalties and other costs to ensure you’re getting the right deal for you.