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.
If you’re thinking this could be right for you, here are some things to consider before taking the plunge.
What is personal contract hire?
Personal contract hire (PCH) is one of the most popular ways of leasing a car.
It's main difference with other contract hire agreements is that it applies to individuals, rather than businesses.
At the start of the agreement you pay a deposit - normally the equivalent of six, nine, or 12 monthly installments - followed by a set payment each month.
The most common contracts are for 12, 24, 36 and 48 months, although others do exist.
As a general rule: the longer the agreement, the lower the monthly payments.
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 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.
At the end of a PCH contract 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 commonly known as a 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 give it back and lease a new vehicle, if you wish.
A third advantage with PCH is that deals sometimes include a maintenance package, which covers certain 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.
Keith Hawes, Director of Nationwide Vehicle Contracts, says:
"Personal Contract Hire is easy to understand. Customers don’t have the inconvenience of selling their car - they just hand it back at the end of the contract, leaving them free to lease a new car if they want. It's this simplicity that has enabled personal leasing to catch on.”
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 a car, then PCH isn’t the right option for you. Instead you may want to look at other car finance options, such as personal contract purchase (PCP) or hire purchase.
Read more: Your car finance options explained
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.
Can I lease a car if I have bad credit?
A bad credit rating can limit your options when it comes to car finance and leasing.
Just like any lending agreement, companies take your credit score into account. A low credit score means more risk for the lender. So you're less likely to find a wide range of deals that are right for you.
There are some companies that specialise in bad credit car leasing. But many companies may not offer you a lease agreement if your credit rating is poor. And the ones that do are likely to offer higher interest rates.
A car finance deal could be a good alternative. Take a look at how you can improve your credit rating and see what deals are available for those with poor credit.
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.