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01 Feb 2021
Jamie Gibbs Jamie Gibbs

Personal contract hire explained

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Couple looking at a car in a showroom while a car salesman looks on

Thinking of leasing a car? Here’s what you need to know before you dive in.

When working out your options for getting a car, one possibility that may surprise you is personal contract hire (PCH), also called car leasing.

Some people think that PCH is something only for businesses. But it could be a suitable alternative to other finance packages.

Note that we’ll be using the terms PCH and leasing interchangeably.

 

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What is personal contract hire? 

PCH works in many ways similar to traditional car financing agreements: 

  1. Make an initial deposit. This can be the equivalent of three, six or nine months’ worth of instalments. 

  2. Make set monthly payments for the agreed length of time. 

  3. Return the car to the leasing company at the end of the agreement. 

 

It sounds a lot like how a personal contract purchase (PCP) agreement works. And for the most part they’re quite similar. 

The main difference is that with a PCP agreement, you have the option of keeping the car after making a larger ‘balloon payment’. 

With PCH, that option isn’t there. You give the car back after making your monthly payments. 

So, PCH is a form of long-term car hire rather than a way to own a car outright. 

 

Are there mileage allowances with leasing? 

Yes, most PCH agreements come with an annual mileage allowance that you’ll agree to beforehand. 

If you exceed this allowance, there could be an extra charge per mile you go over. 

 

Car leasing: pros and cons 

Pros 

  • Monthly payment could be cheaper than with other finance agreements. 

  • Since you give the car back at the end, you don’t need to worry about depreciation. 

  • Some PCH packages may also include car tax and regular servicing. · You get the freedom to change your car every few years without worrying about having to sell the old one.

Cons

  • You don’t own the car at the end of the agreement.

  • PCH deals, like PCP deals, come with an annual mileage allowance. Going over this could mean extra charges.

  • Most agreements require you to return the car in good repair and condition. So any excessive damage could cost you at the end.

 

Paul Harrison, Head of Strategic Partnerships at Leasing.com, says:

“Personal contract hire is popular as it’s easy to understand and available to everyone.

Customers are paying to use the car, not own it, so there are no depreciation headaches or confusing balloon payments at the end of the contract.

Payments usually include annual road tax and breakdown assistance, and new cars come with a manufacturer warranty, which all provide peace of mind motoring.”

 

Can I cancel a leasing agreement before the rental period ends?

This will depend on the specific lender as to what their terms are for cancellations, also called ‘early termination’.

Chances are there’ll be a fee for cancelling early, but the amount could vary between lenders. Check the specifics of the agreement before committing to anything.

 

Can I lease a car if I have bad credit?

Yes, you can. But you may find that your options are limited if you’ve got a bad credit rating. Many lenders could either refuse to offer you a deal or offer you one with higher rates.

There may be some companies that specialise in bad credit car leasing. But you could also work on improving your credit score to make you a better fit for more lenders.

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